4 Tips to Avoid the Payday-Loan Trap

High fees and controversial collection practices have made lenders who offer payday loans a target of regulators and consumer protection advocates. Now an unexpected source is joining the fight.

Earlier this week, JPMorgan Chase (JPM) said that it would limit overdraft fees resulting from payday-lender payments and make it easier for customers to close accounts and issue stop-payment orders on checks for payday loans. The move comes after a New York Times article reported questionable practices among big banks JPMorgan, Bank of America (BAC), and Wells Fargo (WFC) in allowing automatic withdrawals from bank accounts for payday-loan payments even in states where such loans are illegal.

But big banks can't stop the cycle of financial devastation that payday loans can cause. Only borrowers themselves can.

Here are four ways you can steer clear of payday loans and the big hit they can cause to your finances.

Tip 1: Ask your lenders for help.
Creditors have a reputation for being hard-nosed and impossible to negotiate with, but in reality, they're often willing to take steps to help you if it will increase the likelihood that they'll eventually get their loans repaid. Often, you can get extensions that will help your short-term cash situation. And even if you pay a late fee, it can be less than charges for a payday loan.

Tip 2: Shop around.
You can get money more cheaply from other sources than from payday lenders. Many local credit unions and small banks will offer unsecured loans to customers. Although the rates aren't as low as the rates they typically charge for home or auto loans, they're nevertheless quite a bit below what you'll pay on a payday loan. Even credit-card advances can end up costing you less in the long run, despite upfront transaction fees and high interest rates taking effect immediately.

Tip 3: Get a pro in your corner.
Consumer credit counseling services are nonprofit organizations designed to help you improve your credit. In addition to helping you work on budgeting and other personal financial planning, credit counselors can work with credit-card companies and other lenders to help you get your existing loans in order. To make sure you're working with a reputable credit counselor, check with the National Foundation for Credit Counseling to see if your counselor is a member. Also, the Justice Department maintains a website with a list of approved credit counseling agencies.

Tip 4: If you're in the military, use the extra protection you have.
Members of the military and their families enjoy special provisions that protect them from bad practices from payday lenders. Interest-rate limits of 36 percent apply -- that includes fees and other charges. And payday lenders can't require checks or bank-account access in exchange for making the loan. Taking advantage of those protections can make a big difference in how much a payday loan costs.

Be Smart About Payday Loans
When you're in a financial bind, payday loans can seem like an easy fix. But by seeking alternatives, you'll avoid what can become an endless and inescapable cycle of escalating debt that could jeopardize your finances for the rest of your life.

Motley Fool contributor Dan Caplinger owns warrants on Bank of America and JPMorgan Chase. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo.