Dear Debt Adviser, I co-signed for a friend's payday loan, and unfortunately he's failed to pay it off. I can't cover the bill, so I asked a payday loan assistance company for help. They said they would, and they even promised to send cease-and-desist letters to the creditor. But the creditor told me that it can still come after me. Is this true? -- Beatrice
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Dear Beatrice, You can see why I advise against co-signing for loans. It's a disaster waiting to happen. And those payday loan assistance companies may not deliver what they promise.
A payday loan is a short-term loan with high fees that many individuals secure because they believe it is a good solution for an immediate problem. The loan may cover up or postpone your day of reckoning, but it's often the worst possible solution. Most loans are rolled over many times because the borrower does not have enough money to pay the monthly bills. It is a vicious, expensive cycle that is very difficult to stop and causes tremendous financial burdens for many families.
Your creditor is right, by the way. The loan assistance company will try to settle your payday loans for less than what you owe. But until it's successful (and the overwhelming majority are not) you will continue to deal with the very aggressive collection efforts from the lender. And sending a cease-and-desist letter will not stop collection efforts. The Fair Debt Collection Practices Act prohibits creditors from contacting you if you send a letter requesting it. But they still may sue you in court.
Here's my advice: I don't typically recommend borrowing to get out of debt, but a consolidation loan may be a good idea for you. It will allow you to pay your debts in full. In return, you would be required to send monthly payments to a new lender. Those payments would hopefully be at a lower interest rate with fewer fees.
Before taking on a consolidation loan, make sure you know the interest rate, fees and penalties for missed payments. You also must prove you have enough income to make the payments. However, rather than providing that proof yourself, I suggest you ask your friend to step up and take responsibility for this debt. He should have handled this from the beginning. Finally, I'd feel better if you took a consolidation loan from a mainstream lender such as a bank or credit union.
If my readers are seriously considering a payday loan, I suggest they at least take the precaution of using a lender that is a member of the Community Financial Services Association of America, or CFSA, whose members subscribe to some industry best practices.