Payday loan debt is becoming an increasingly common problem among Americans. While borrowing from payday lenders is one of the fastest ways to get extra money, it often results in falling into the payday loan trap.
Payday loans usually come with high interest rates and additional fees, which are often unaffordable for borrowers. As a result, they start applying for new loans to repay the previous ones and can’t stop. Keep reading to learn how to get out of payday loans legally and break the cycle of debt.
How Does a Payday Loan Work?
A payday loan is a short-term loan, usually of up to $1,000, taken for a borrower’s next paycheck. This type of loan is often used as a solution for minor financial difficulties, such as car repairs, home improvements, high medical bills, utilities, etc.
People often choose this financial option due to the simplicity of borrowing cash from payday lenders. They don’t perform a hard credit check and accept borrowers even with bad credit histories.
The repayment period for payday loans is usually up to 30 days. Within this term, you need to return the cash with interest rates and fees. In most cases, lenders automatically withdraw the funds from your checking account.
Many financial experts recommend people avoid payday loans due to their high-interest rates, reaching 400% APR, and short repayment periods. Borrowers often roll over their payday loans or take new ones due to the inability to return an original loan.
Therefore, many financial experts recommend considering other same-day personal loans.
Although you may also be charged an additional fee and interest, you can find an option with more convenient payments and a lower total loan cost. Unlike payday lenders, many personal loan providers allow borrowers to repay the loan within several months.
Payday Loan Debt Cycle
A payday loan debt cycle occurs when you continually take on more debt than you can return. It is when you apply for new loans to repay your existing debt. The more you borrow, the higher interest rates and other charges you need to pay. As a result, repaying the debt becomes more difficult than it was earlier.
How to Get Out of Payday Loan Debt?
It is crucial to learn about your payday loan, its APR (annual percentage rate), and other costs involved before you decide to sign a loan agreement. Many people apply for payday loans without considering all the additional expenses.
As a result, they are unable to repay the cash on time and fall into the payday loan trap. If you face such difficulties, here are the most common tips to get out of payday loan debt.
#1. Extended Payment Plans (EPPs)
A debt management plan is a common solution for payday loan borrowers in many states. They allow people to repay payday loans over a longer period. Any payday lender belonging to the CFSA trade association will offer an extended payment plan to any borrower who has problems with repaying the cash on time.
#2. Debt Consolidation Loans
Taking a debt consolidation loan is an excellent way to pay off your payday loan. It comes with a lower interest rate and allows you to consolidate a payday loan and repay your credit card balance and other high-interest debt. This type of personal loan rolls multiple debts into one loan with one monthly payment. It helps you save money and organize your finances.
#3. Borrowing Money from Family or Friends
Asking your family member or friend for help is the cheapest, simplest, and safest way to repay payday loans and take a step toward a better financial future. You can borrow money from people you know without paying any fees and other costs. They don’t require a good credit score from you and don’t conduct a hard credit check before giving you cash.
#4. Small-Dollar Loans from Credit Unions or Banks
Another way to get out of a payday loan is to get a more affordable loan from a traditional financial institution instead of taking another payday loan from an online lender. If you want to borrow money from a credit union, you need to be a member of the financial institution.
In most credit unions, membership is simple and affordable and comes with many benefits. It enables you to borrow payday alternative loans (PALs) and other small loans of up to $1,000 with no credit check. They come with a maximum interest rate of 28% APR.
The most traditional way to get cash is to take a personal loan from a bank. While traditional personal loans cost less than payday loans and other short-term options, you need a good or excellent credit history to qualify. Otherwise, you can be refused and need to look for alternatives.
#5. Help with Payday Loans from Nonprofit Credit Counseling Agencies
A credit counseling agency is an organization that can help you get out of debt. These agencies can help you create a budget, cover your bills, and look for debt payment options for you. Credit counselors can even work on a debt management plan with you. With the plan, you pay the agency, and it repays your creditors and may charge you a fee.
#6. Financial Assistance from Local Organizations
In almost every city, you can find organizations that offer financial assistance to their members in need. Various religious groups, nonprofits, and charities may be an excellent way to pay off your debt to a creditor. Many organizations work to help people with repayment of payday loans and can help you cover rent, groceries, and other basic expenses.
#7. Increasing Your Income
One of the main tips for paying off payday loans to creditors is to owe more funds. You can owe more cash by increasing your income. A larger budget can make your payday loan repayment much easier and faster.
Finding extra work can significantly simplify making your payments to a lender. It has not been a full-time job, as even part-time can help you pay off your debt.
#8. Cutting Your Expenses
When you need to pay off a payday loan, cutting your costs may be the only option to get funds to make payments for your debt. Start making meals at home instead of eating in restaurants and buying food at work. It may also be necessary to spend less on entertainment and other expenses.
Alternatives to Payday Loans
Avoiding payday loans and predatory lenders is the best way to avoid falling into the debt trap. If you need extra cash to pay for any unexpected cost, you can consider the following alternatives to taking funds from payday lenders:
Payday Alternative Loan (PAL)
Getting a payday alternative loan from a credit union is not only an excellent way to make a repayment to your payday lender. PALs can also be used to pay for your minor financial costs. If you are a credit union member for at least 30 days with an open account in good standing, you can borrow up to $2,000 from your financial institution.
Personal loans are an excellent way to get funds to pay for your unforeseen costs. You can apply for a personal loan both in person in a bank or through online lenders. While traditional lenders usually check your credit report before making a payment to your bank account, online lenders can approve your request if you have at least proof of a stable income.
Although credit card cash advances are more expensive than traditional personal loans from banks, credit unions, or online lenders, they are still more attractive for consumers than many other options. They allow people to get fast cash regardless of their credit.
What to Do After Getting Out of Payday Loan Trap?
After repaying loans with fees and interest to payday lenders, it is crucial to do your best to avoid this experience again. Start working on improving your credit score as soon as possible. A good credit history will enable you to qualify for cheaper and more convenient loan options instead of those from payday lenders.
You should also think about building an emergency fund where you can take money to pay for your financial emergencies. Consider membership in a credit union to take a loan there in the future instead of applying through payday lenders.
The Bottom Line: How to Get Rid of Payday Loans Fast?
Paying off payday loans is often challenging and impossible for borrowers, especially with extra fees for late or missed payments. Many people file bankruptcy due to the inability to cover the loan cost within the short term. You should avoid this borrowing option if you can’t afford all the additional expenses involved.
Many financial experts and counselors offer help with payday loans and their consolidation. There are many options to get rid of your debt, such as creating a payment plan, taking PALs, borrowing from relatives, etc. Choose the most suitable way for your situation and start a new chapter in your financial life.