What would happen to your finances if an emergency were to pop up before your next payday? For many Americans, the answer is not pretty.
A survey of 1,000 adults by Charles Schwab & Co. last year found that 59% are living paycheck to paycheck. Nearly half said they struggle to keep up with their monthly bills.
They include Angela Vanderhoof, a state employee in Olympia, Washington, who got behind on her bills in 2010, then became the victim of a brutal assault. "I had shattered fingertips and 14 stitches to kind of put me back together," she told CNBC's "American Greed." "I had to take a leave of absence from work."
That's when she learned that in addition to her physical attackers, a swarm of financial predators is ready to pounce on people at their most vulnerable.
In Vanderhoof's case, the predator was Scott Tucker, owner of a network of online payday lenders. Weeks before the assault, Vanderhoof had borrowed $400 from one of those lenders, One Click Cash, to cover her car payment. She said she understood that the interest would bring her debt to $520. After the attack, she asked for an extension, and the company happily obliged. But the result for Vanderhoof was disastrous.
With the company continuing to charge interest on the unpaid balance — and interest on the interest — her $400 loan would ultimately cost $1,300, plus $200 in overdraft fees when the company tried to debit her empty checking account. Her effort to merely stay afloat until her next paycheck instead left her drowning in debt.
"They just kind of turned into piranhas and just attacked my account," she said.
A federal jury in New York convicted Tucker in 2017 on 14 counts, including racketeering, extortion, fraud and money laundering. He was sentenced to 17 years in prison for what prosecutors described as a $1 billion scheme that "systematically exploited over 4½ million working people throughout the United States who were struggling to pay basic living expenses."
Prosecutors said Tucker's businesses charged interest rates of 700% or more, using deceptive tactics to rope in unsuspecting borrowers such as Vanderhoof.
"There's obviously at the highest level just the willingness to lie to get people's money," Assistant U.S. Attorney Niketh Velamoor told "American Greed."
While the feds managed to shut Tucker down and many states have outlawed payday loans altogether, predators still abound. Fortunately, there are ways to avoid becoming a victim, even when your situation seems desperate.
"The first thing that you can do is buy yourself some breathing space so that you can shop around and look at alternatives," said Ioana Gorecki, an attorney with the Federal Trade Commission who helped build the agency's civil case against Tucker, his companies, and others involved in the fraud.
The FTC and the Department of Justice say they have secured more than $500 million in refunds for Tucker's victims. But Gorecki said there are plenty of things cash-strapped consumers can do to avoid becoming a victim in the first place.
"One thing you can do when you realize that you're not going to be able to meet a payment obligation or bill is to reach out to your creditor right away. Let them know that you cannot make the bill," she told "American Greed." "Let them know that you'd like either an extension or a change in the payment plan."
The idea is that creditors would rather have a partial payment than nothing at all, so chances are they will be willing to work with you. But that does little to address the underlying issue of your cash crunch. Fortunately, Gorecki said, there are solutions that are far less costly than a payday loan.
If, like most Americans, you have multiple debts, consider restructuring them into a plan that is more manageable for your monthly budget. Your bank may be able to help with a debt consolidation loan, but tightening lending standards in the wake of the 2008 financial crisis have made bank loans either impossible to obtain or prohibitively expensive for borrowers with poor credit. Another option is a credit union.
Unlike banks, which are for-profit companies owned by shareholders, credit unions are nonprofit organizations owned by their members — in other words, their customers. That allows them to offer better terms than a bank on loans and deposits, according to the Credit Union National Association, which represents the more than 5,000 federally insured credit unions in the U.S. Some 115 million Americans belong to a credit union.
"Credit unions can be an excellent source of small personal loans, and they sometimes come with much lower interest rates and lower charges and fees," Gorecki said.
Before you take out any type of loan, make sure you understand the terms, including the amount of interest you will pay. All should be clearly spelled out. If you don't understand, don't sign.
"The key here really is to compare and contrast all the options," Gorecki said. "Take a look at the A.P.R., which is the annual percentage rate — not just the interest rate — and take a look at all the fees and the charges and any other terms associated with the loan or the cash advance that you're receiving."
You may also be able to get help from your employer in the form of an advance on your paycheck — like a payday loan but without the triple-digit interest rates.
"If consumers are able to obtain an advance on their paychecks from their employers, then they wouldn't need to borrow money at all," Gorecki said.
If your problems go deeper, or if you find yourself short of funds on a regular basis, you may want to turn to a credit counseling service.
"These agencies are usually nonprofits, and for a very low fee or no fee at all, they can generally help consumers create budgets," Gorecki said. "They can help you work within your salary, they can help you work within your payment plan, and they can help you come up with a debt management solution that is more long term and does not require frequent, short-term infusions of cash."
According to the National Federation for Credit Counseling, which offers an online directory of member agencies, a typical counseling session takes as little as 30 minutes. Most offer services over the phone, but you may also be able to work with a counselor online or in person. The counselor will ask questions about your finances, your challenges and goals, and will help you develop a plan to break the cycle of debt.
Does it ever make sense to turn to a payday lender? A national organization representing short-term lenders says they offer important benefits to the estimated 12 million Americans who use them.
"Small-dollar loans are an extremely valuable product and provide an important source of credit to millions of Americans," says the Community Financial Services Association of America on its website. The group notes that 35 states still allow the loans on a "highly regulated" basis.
The organization has successfully fought some federal restrictions on the loans, arguing that denying consumers access to the credit can push them further into debt, or force them to seek out risky offshore lenders.
Even Gorecki conceded that payday loans can serve a purpose, within reason.
"Consumers should really consider taking out only as much as they will be able to cover with their next paycheck," she said. "And consumers should also consider that their next paycheck is also going to be needed to pay for expenses that will take them until the following paycheck."
In other words, borrow as little money as you possibly can. And do not allow the debt to roll over, because that is when finance charges start to pile up.
If you believe you are the victim of predatory lending, do not wait to get help. File a complaint.
States are typically the primary regulators of loan companies, so contact your state Attorney General's office to get information or lodge a complaint. Your local Better Business Bureau may also be able to help. Federal resources include the Consumer Financial Protection Bureau and the Federal Trade Commission.
"The Federal Trade Commission, on its website, has a prominent button that people can press in order to submit complaints about any types of predatory businesses, and consumers should definitely let us know if there are problems," Gorecki said.
Perhaps most important, keep your wits about you. There is a way out of your financial hole, but one of the keys is to not let your emotions get the better of you. That is what predators like Scott Tucker depend on.
See how predatory lender Scott Tucker scammed $1 billion from desperate borrowers. Catch an ALL NEW episode of "American Greed," Monday, Jan. 20 at 10 p.m. ET/PT only on CNBC.