93% of payday loan borrowers regret taking out their loans, survey finds

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Payday loans can be a debt trap for borrowers who cannot afford to make payments. Here’s how you can pay off your payday loan balance before it goes to debt collectors. (iStock)

Payday lenders prey on borrowers with bad credit who are in desperate need of cash, trapping them in a cycle of hard-to-repay high-interest debt.

The vast majority (93%) of borrowers regret having taken out their personal loan, according to a new survey from DebtHammer. Only 1% of respondents said their financial situation had improved after borrowing a payday loan, while 84% said their financial situation had deteriorated.

Payday loans offer consumers the option of borrowing small, short-term cash loans without a credit check. But the typical repayment period is only two weeks, leading 4 in 5 borrowers to borrow a new payday loan to pay off their current debt, the Consumer Financial Protection Bureau (CFPB) reported.

It is possible to get out of payday loan debt without renewing your loan and without incurring additional costs. Read on for tips on how to break the cycle of payday borrowing, like consolidating debt with a personal loan. You can compare free debt consolidation loan rates on Credible without impacting your credit score.

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3 ways to get out of a payday loan

The average cost of a payday loan works out to an annual percentage rate (APR) of almost 400%.

Payday lenders may trick you into believing that renewing your loan is the only way to pay off your debt, but it isn’t. Here are some alternative ways to break the payday loan cycle:

  1. Debt Consolidation Loans
  2. Extended payment plans
  3. Credit counseling

Find out about each repayment plan in the sections below.

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1. Debt Consolidation Loans

Personal loans are lump sum loans that are commonly used to consolidate higher interest rate debt like payday loans. They come with fixed interest rates and repayment terms, which means your monthly payments will be the same while you pay off your debt.

These debt consolidation loans are generally unsecured which means that you don’t have to put any asset as collateral. Because they’re unsecured, lenders determine your interest rate and eligibility based on your credit rating and debt-to-income ratio.

Qualified borrowers can benefit from a low rate on a personal loan for debt consolidation. Personal loan rates are near historic lows, according to the Federal Reserve, averaging 9.39% in the third quarter of 2021.

Some credit unions also offer Small Alternative Payday Loans (ALP), which allow members to borrow up to $ 2,000 with an interest rate cap of 28%. However, these loans can be difficult to find because only a small portion of credit unions offer PALs.

You can see if you qualify for a debt consolidation loan on Credible with a gentle credit check, which will not impact your credit score. Use a personal loan calculator to estimate your monthly payments and see if this option can help you get rid of your payday loan debt.

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2. Extended payment plans

An Extended Payment Plan (EPP) allows payday loan borrowers to repay their debt over a longer period than the usual two-week repayment term. Many states require payday lenders to offer PEPs, so you’ll need to research your state’s laws to see if you’re eligible.

Some payday lenders may offer RPEs, although they are required to do so by law. Lenders belonging to the Community Financial Services Association of America (CFSA) are required to offer PEPs to borrowers, but other financial institutions may not offer this option.

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3. Credit counseling

Nonprofit credit counseling agencies offer free or low cost services to borrowers who are struggling to manage their debt. One such service includes enrolling payday loan borrowers on a Debt Management Plan (DMP).

As part of a DMP, a credit counselor will help you budget and set a debt repayment schedule. Credit counselors can help you negotiate with payday lenders to get a lower interest rate or reduce the loan amount.

You can view a full list of certified nonprofit credit counselors on the Department of Justice website. If you still have questions about payday loan debt relief, learn more about debt consolidation by contacting a knowledgeable loan officer on Credible.

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Have a finance-related question, but you don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.


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