The Consumer Financial Protection Bureau (CFPB) defines payday loans as high-cost, short-term loans due on your next payday. It is usually paid in a lump sum payment two to four weeks after the loan was made. Loan interest rates are higher than your average loan, amounting to over 400% annually.
Since payday loan lenders do not look at the credit history and credit scores of borrowers, typically anyone with a bank account can apply and get approved for the payday loan. The debt trap starts when payday loan borrowers cannot pay off the loan at the designated date and applies for a rollover—paying only interest fees to payday lenders to extend the due date of the payday loan. In such cases, predatory lenders offer loan renewals to help borrowers pay off existing payday loan debt.
Extended payment plans and debt settlement can lead to a never-ending payday loan debt cycle. Statistics show that an average borrower extends their payday loans at least once, and some even renew their payday loans over ten times or as much as the payday lending company allows.
How to Get Out of Payday Loan Trap
1. Debt Settlement Program
Getting stuck in a payday loan debt cycle is overwhelming. The good news is, there are existing companies that can provide payday loan help to those who need to consolidate debt that is weighing on them.
Applying to a debt settlement program for a debt consolidation loan allows you to turn over your payday loan debt to a company. This company will be in charge of repaying your payday loan and negotiating with payday lenders for a better payment plan. The company that will be in charge of your debt management will then require you to pay a flat monthly fee that will cover their services and the payment for the payday loan.
Getting into a debt settlement program will stop payday lenders from automatically taking the loan amount from your bank account if you cannot pay the payday loan amount on or before the due date.
2. Prioritize the Interest Rate
Another way that payday loans trap you is having access to multiple payday loans. Payday lenders not performing credit checks allows an average borrower a minimum of two active payday loans. In most cases, borrowers also have other payables such as a personal loan or credit card debt.
The first thing you have to do is plan your finances. First, organize your payday loans in order of their interest rate. Then, read and review each loan’s terms and conditions. Next, prioritize paying off the payday loan with the highest interest rate. As a rule, the higher the interest rate, the higher the payday loan debt.
Other non-payday loan debt, such as personal loans and credit card debt, can be at the bottom of your priority. A personal loan usually has a lower interest rate, while credit card debts accumulate even lesser interest.
Looking into the interest rates of your payday loans may feel taxing, but you have to understand that knowing your APRs will help you better manage your payday loans.
3. Extend Payment Plans
Payday lenders are borrowers’ advocates—they will want you to pay the money you owe them. Telling them that you can’t pay your loan will necessitate them to think of other options. One of the options you can look into is extended payment plans.
Ask your payday lenders if they offer extended payment plans. Although not all payday lenders offer this kind of payment option, knowing whether or not your lender offers it will be beneficial during your loan.
Make sure to read the terms and conditions of the extended payment plan, as this kind of plan may come at a price— usually in the form of higher interest.
4. Look Into Personal Loans
Different kinds of loans other than payday loans are available everywhere. One of these loans is a personal loan, which is usually used to pay off bigger loans.
An unsecured personal loan doesn’t require a borrower’s asset as collateral. Instead, their credit scores will be checked. Unsecured personal loans include, but are not limited to, credit cards and student loans.
At a minimum, a credit score of 580 will be needed. Having bad credit may stop you from being approved for this loan.
5. Credit Counseling Agency
Financial matters are often difficult to understand, let alone manage. Adding payday loans into the mix makes it even tougher. Tapping the help of a credit counseling agency will grant you access to a personal credit counselor who will help you understand where your financial struggle is coming from and devise a payment plan that can get you out of your debt cycle.
Getting a credit counselor may seem like it is out of reach if you are in the middle of payday loan debt. Fortunately, various nonprofit companies and organizations offer free credit counseling and financial planning. Some of which include credit unions, local government agencies, and universities. Be wary of scam artists pretending to be a representative of nonprofit companies. Thus, do your research on the nonprofit organizations that can help you and stay vigilant.
These organizations will walk you through the process of breaking free from your debt cycle and help you set up a debt management plan that will include budgeting. The Federal Trade Commission (FTC) provides more information on how to choose the right credit counselor.
6. Ask For Help From Family and Friends
One way to pay off your loan is to borrow money from your friends and family. Doing this may not be easy, but the chance to borrow money without interest can go a long way in helping you settle your debts.
Another option is to reach out to your community. Churches and small groups have systems where their members reach out to each other and support and help them through a financial situation.
7. Ask for Advance Payment
Long tenure and good relationships with employers can qualify you to cash advances. Many employers offer advance payments to their employees with good standing and excellent work performance.
So, communicate with your employer and explain your situation. Most employers are sympathetic to their employee’s situation, especially if granting your request will lead to better job performance.
Put yourself out there and offer to put in extra hours. This will not only build a good relationship between you, your work, and your employer, but also earn you extra cash. Hitting two birds with one stone isn’t so bad.
8. Work Overtime and/or Do Side Jobs
Most employees who work overtime are entitled to overtime pay. The usual payment scheme for overtime work is one and a half times your regular hourly pay. Working for an extra two hours per day or over ten hours per week accumulates fast and gets you more money by the end of the month. This means extra money on your paycheck and an additional source of income to be used to pay off your loan.
Another way to make extra money is by taking on side jobs. This can be as simple as walking your neighbor’s dog, driving for a ride-sharing company after work, or delivering food for your local diner. If you want a steady cash flow from your side job, try considering doing freelance work. Freelancer sites never run out of job postings. It may not be easy to build up your profile and attract regular clients, but once you’ve settled in, everything will become smooth and easy. There will always be extra time on your every day outside of your formal job. Use it.
An extra tip we can offer you is to cut down on your expenses. If you are the type of person that budgets your daily expenses, find an item to spend less on. For example, you can make your coffee instead of buying it from a store, save on commuting costs by walking to your place of work, hold off on buying new clothes or shoes, or even pack your lunch.
9. Don’t Take Other Payday Loans
This is something you have to take to heart. Do not take on new payday loans. Paying off your current loan by getting another loan is not a good idea. Do whatever you need to do—work overtime, reach out to family and friends, or do side jobs, but never fall back into the debt cycle. Nothing can compare to that feeling of relief knowing that after paying off your loans, you are now debt-free!
10. Look For a Support Group
There is nothing more comforting than knowing you are not alone in this struggle. Being a part of a support group has its benefits—to be surrounded by people who have the same goals can keep you in check and keep you motivated to follow through with your goals and plans.
If you feel stuck, you can always turn to your support group and ask for advice. You can also learn from their mistakes or copy things they are doing that seem to be working. Depending on where you are in your journey of breaking free from the payday loan trap, you can even help other people get out of theirs!
The best part about being a member of a support group is that you can stay out of the debt cycle once you’ve gotten out of it and have people around you to keep you from reverting to old habits.
Take Away
Getting out of the payday debt cycle is hard, but it is not impossible. Meeting the right payday loans lender can prevent you from getting stuck in the trap, and choosing the right credit counseling agency can help you build a financial future with no debt hovering over you. It may seem hard now, but having no debt with money in your bank account is a future that everyone deserves.
Frequently Asked Questions
How Do You Get Out of a Payday Loan Nightmare?
There are different ways of getting out of the debt cycle:
- Turn to professionals for help, such as a credit counseling agency, sign up for a credit settlement program, and seek advice from a personal credit counselor.
- Ask your family, friends, and community for non-interest loans.
- Work extra hours, talk to employers for a cash advance, and do side jobs. Doing extra jobs can increase your cash flow and allow you to meet the deadline for your loan.
- Ask for a loan extension from your lender.
- Avoid taking out a new loan to pay off your current one–this will only push you deeper into the trap.
Can I Close My Bank Account to Stop Payday Loan Payments?
Yes, but your lender will find another way to get the money that may also cause you to incur additional fees.
When applying for payday loans, you either issue a personal check or give the lender permission to withdraw money from your account. Closing your bank account will not stop the lender from taking their money and may constantly try to withdraw which will result in overdraft fees.
Your lender can also sell your debt to a credit collector, which will cost you more fees and costs.
Can I Get Out of Payday Loans?
Yes. Although getting out of it seems hard, it will take perseverance and self-discipline to push through. Read the article above for more details.
How Can I Legally Avoid Paying Payday Loans?
- You can call or write to the lending company for permission to revoke authorization—this will stop them from automatically taking payment from your account.
- Tell your bank that you revoke automatic payments.
- Give your bank a stop payment order—this will stop payday loans from being automatically charged to your account.
- Tell your bank to revoke all unauthorized automatic payments.
You can stop paying your payday loan legally, but it will not cancel your contract with the lending company. You will still owe the payday lending company.
