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Taking out payday loans can land you in a never-ending cycle of increasingly high payments that can leave you trapped. In other words, they’re a really bad idea. If you’ve already figured this out the hard way, here’s what you can do about getting out of payday loan debt.
The Payday Snare
With high interest equal to annual percentage rates of 400 percent or more and a short repayment period – usually two weeks – payday loans are both costly and stressful to deal with. That’s especially true if you get caught up in their hamster wheel of loan extensions.
There are two ways to extend payday loans, including paying only the interest charge on the loan when repayment in full is due. This extends the loan without making a dent in it, and the original loan is due again in two weeks.
The other way, which is even costlier, involves making no payment when the original loan is due and instead of taking out a new loan for the sum of the original loan plus the interest owed on that loan. On top of that, a new, higher interest charged is added.
The cost of payday borrowing can go up even more as some lenders require access to borrowers’ checking accounts, then make repeated withdrawal attempts. This can lead to multiple overdraft penalties.
What If I Can’t Repay?
Missing payments on a payday loan will immediately get your account to collections, which deals another blow to your credit score. If you have a payday loan and find yourself entangled in a growing debt your situation may feel dire, but some strategies can help you out of the trap.
Methods of Eradicating Payday Loan Debt
Extended payment plan(EPP)
Many states require payday lenders to offer EPPs, which are procedures that let you repay your loan over a longer period – usually four weekly payments. Check to see what your state requires.
Debt consolidation loans
Aside from avoiding payday lenders in the first place, the best strategy for paying down debt could be a personal debt consolidation loan. The process entails getting a low-interest loan to cover unsecured existing obligations such as high-interest credit card balances.
You’ll then make monthly installments on the new loan of the same amount each month. While such loans require a credit check, some lenders do cater to borrowers with little to no credit — at higher rates of interest.
Payday alternative loans
These are short-term loans from credit unions of up to $1,000 and require no credit check. While they are intended for use as an alternative to payday loans, you can use one to pay off a payday loan as well. Such loans carry a maximum 28 percent annual percentage rate, and they can be repaid in monthly installments over six months tops.
Peer-to-peer loans
Online lenders don’t always check credit scores, but they do usually need evidence of income and other assets that can make getting a loan difficult if you don’t have good credit. However, you may want to check them out anyway, particularly if the amount requested is under $5,000.
Debt management plan
This plan calls for you to work with a certified credit counselor to establish a budget and debt repayment schedule.
The counselor may negotiate with payday lenders and other creditors to accept less than what is owed. To participate, you must close all your credit cards, and the plan is noted on your credit report.
As you can see, it’s hard getting out of payday loan debt. So, it’s best to avoid those lenders. Most are in business specifically to prey upon people who are in financial trouble, they aren’t the beacons of generosity they set themselves up to be.
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