A payday loan can appear to be a quick and easy way to borrow money to solve an immediate financial need or an emergency. The problem is many borrowers wind up in a payday loan debt cycle where they end up paying much more than the original loan. But there are many options for consumers to get out of the payday loan debt trap, such as a payday alternative loan (PAL), personal loan, 0% credit card, or debt consolidation loan.
When your financial situation gets tricky — like if you need an emergency car repair or you’re just having trouble covering your monthly bills — it’s normal to seek out ways to get over the hump and back on track. Sometimes a payday loan can seem like your best option, and let’s face it, most payday lenders can make it seem like an attractive proposition when you’re desperate.
Read on to learn more about payday loans, get information on how they work, and find suggestions for how to get out from under the payday loan nightmare. First, let’s take a quick look at how payday loans work.
How payday loans work
Payday loans are generally high-interest loans, with short repayment periods, for small amounts — usually $500 or less, although that can vary with individual payday loan lenders. Once the loan term is up, you must repay the loan in full plus any fees or interest added to the principal.
When you take out the loan, payday lenders usually require you to post-date a check for the full loan amount, plus fees, or give them authorization to electronically debit the money from your bank, credit union, or prepaid card account, says the Consumer Financial Protection Bureau (CFPB). If you don’t repay the loan by the due date, the payday lender can cash the check or withdraw the funds electronically.
But things get complicated when the loan term is up (usually in just two weeks), and you find you’re still short of the cash needed to pay off the existing payday loan debt. For example, if you don’t pay, and there isn’t enough money in your checking account, the payday lender can attempt to withdraw the money, resulting in overdraft fees.
This is often one of the reasons people feel the need to take on more debt from payday loan lenders, resulting in even more high-interest debt and, ultimately, the dreaded payday loan trap, says Derek Sall, Founder and Lead at Life and My Finances.
How to get help with payday loans
If you find yourself in that cycle of debt with payday loans, don’t despair. There are a number of options to explore that can help you get out of payday loan debt.
Extended payment plans
Depending on the rules in your state, some payday loan companies may be required to offer extended payment plans (EPPs) to borrowers having trouble with payday loan debt. The repayment plan is designed to give you a little more time at no extra cost. The payment plan typically comes in four weekly installments and can include payday loan consolidation (if you have more than one).
The problem with EPPs is that some less-than-reputable payday lenders may not always let you know that this option is available to you. As a borrower, it’s important for you to read the fine print on the loans and ask questions so you know what you’re getting into. Also, be aware that EPPs may not be available in every state.
Research local and federal financial assistance programs
If you’re strapped for cash, another option is to look into what your city or state has to offer in the form of financial assistance. You may not be able to get help with actually paying off payday loan debt, but if you can get help with other needs, it might free up some cash to pay back your payday debt.
In some cases, however, you may be able to get direct financial assistance for your payday loan debt through nonprofit organizations that specialize in helping low-income borrowers and borrowers of color get free of payday lending debt. Anne Leland Clark, Executive Director of Exodus Lending in St. Paul, Minnesota, represents just that type of organization.
These types of programs aren’t available everywhere, but it’s certainly worth looking into.
Debt consolidation loans
Personal loans — or debt consolidation loans, which are basically just personal loans meant to consolidate debt — are a further option for payday loan help. Plus, you might qualify for a larger loan amount, meaning you can clear out your payday debt along with other debts like credit card debt, as well.
Keep in mind that a personal loan is still a debt that needs to be repaid, but it’s a lower-interest debt that you’ll have considerably more time to pay back. Click here to learn more about the similarities and differences between payday loans and personal loans.
It’s also important to note that a personal loan lender will look at your credit scores and credit history as part of the application process. If you have bad credit, you may not qualify for a personal loan, so this solution isn’t available to just anyone.
Payday alternative loans
A payday alternative loan (PAL), usually offered by credit unions (but sometimes by banks or other financial institutions), is exactly what it sounds like. Credit unions offer this option for borrowers in need of quick cash who want to avoid the high interest rates payday lenders charge.
A payday alternative loan, like a payday loan, is also a small-dollar, short-term loan, but it comes with a much lower interest rate. In addition, loan terms are usually up to six months long, giving borrowers more time to repay the loan. And the equal monthly payments that come with PALs can also make them easier to fit into a budget.
It’s important to note that in order to get a payday alternative loan, you must be a credit union member in good standing. Typically, you will also need to be with the credit union for a minimum of 30 days (sometimes longer) to be considered for a PAL. There may also be other requirements (such as monthly income requirements) and an application or origination fee.
While no personal finance experts will recommend you use a high-interest-rate credit card to pay off your payday debts, you could apply for a new credit card with a 0% introductory interest rate. Some of these cards offer 0% interest for up to 20 months, making them essentially short-term loans with no interest.
Keep in mind, though, that if you don’t repay the full debt balance within the introductory period, your interest rate could skyrocket up to 30%.
If you’ve fallen into a situation where payday loans have become a problem for you, help from a nonprofit credit counseling agency is always a smart move. Experienced counselors can help you create a budget you can stick to and go over all of the possibilities to get out of payday debt (and any other debts you may have).
Other alternatives they might be able to explain to you and help you facilitate include getting a debt consolidation loan, implementing a debt management plan, or even arranging debt settlement. In general, expert counseling is a great way to help you get a better handle on your finances, says Prenter.
How to avoid payday debt in the future
“Establishing a solid financial plan is key. This includes setting up an emergency fund, improving financial literacy, and exploring every financial option before resorting to such high-interest loans. Living within your means is also essential to prevent falling into these debt traps,” Prenter concludes.
What happens when people cannot pay off their payday loans?
If you can’t pay off your loans, payday lenders will send your debt to their collections department or to outside debt collectors. This means your inability to repay the loan will go on your credit report and lower your credit scores.
Ironically, most payday lenders don’t report to the credit bureaus when you stick to the repayment plan, but they will typically report you when you can’t pay. And they may also send you to collections and sue you to get their money back, which will stay on your report for up to seven years.
Can I close my bank account to stop payday loans?
If you want to avoid repaying your payday loans, closing your checking account is one way to do it, but we wouldn’t recommend it. Closing your bank account would really only delay your problem slightly and likely cause payday lenders to send your debt to collections.
If the debt collector can’t get you to repay your payday debts then you’ll probably be sued. If they win and get a judgment against you, they may be able to garnish your wages, any other bank accounts you have, or a combination of these. A judgment in their favor isn’t guaranteed, however, at least not if you can prove they used unfair debt collection practices. You may review the rules governing debt collection practices here.
- Payday loans are characterized by short repayment periods, high interest rates, and a high statistical probability of the need to borrow money again.
- The problem with payday loan debt is that a single payday loan often leads to multiple payday loans, making it that much harder for borrowers to get out from under the payday loan trap.
- To get out of payday loan debt, some options to consider are debt consolidation loans, extended payment plans, or payday alternative loans.
- To avoid the payday loan cycle altogether, consider professional counseling to help you create a budget and get your finances back on track.
View Article Sources
- CFPB Data Point: Payday Lending — Consumer Financial Protection Bureau
- Fair Debt Collection Practices Act — Federal Trade Commission
- FCAA Home Page — Financial Counseling Association of America
- In Defense of Payday Lending — Mises Institute
- NFCC Home Page — National Foundation for Credit Counseling
- Payday Loan Alternatives — National Credit Union Administration
- What is a payday loan? — Consumer Financial Protection Bureau
- What To Know About Payday and Car Title Loans — Federal Trade Commission
In addition to these external sources, readers may find multiple links to helpful SuperMoney pages in the article above.