No one likes to be in debt, but it’s even worse when it seems like there is no way out.
That’s what the 12 million Americans who take out payday loans typically feel like each year. That’s understandable, considering they pay about $ 9 billion in loan fees. But there is hope – you don’t have to be stuck in the payday loan debt cycle forever.
Why it’s so easy to get buried in payday loans
Payday loans are unsecured personal loans for people who need cash quickly but do not have the type of credit or collateral required for a more traditional loan. Usually, the only conditions to qualify for a payday loan are an active bank account and a job. Companies like MaxLend, RISE Credit, and CashMax have made an art of providing high interest loans to people who are feeling desperate and strapped for options.
The very structure of payday loans is put in place to keep people on the hook. Here’s a breakdown of what payday loan debt looks like, according to the Pew Charitable Trusts:
- It is not for the short term. Although payday loans are touted as quick and short term loans, the average borrower is in debt for five full months every year.
- The loan costs are huge. The average loan fee is $ 55 every two weeks, and the average borrower pays $ 520 per year for multiple loans of $ 375.
- People borrow for the wrong reasons. Most payday loan borrowers – 70% – spend the money on daily expenses, like groceries, gasoline, and rent, rather than on emergencies.
- It’s a vicious circle. To fully pay off a loan, the average borrower would have to shell out over $ 430 on the payday after the loan. Because this is a big change, most people end up renewing and extending the loan. In fact, 80% of all payday loans are taken out two weeks after another has been paid off in full.
What happens if I don’t repay my personal loan?
As with any other loan, if you default on a payday loan it can lead to escalating fees, penalties, and possible legal action. Since many payday loans use automatic debit payments to withdraw funds directly from a bank or prepaid account, you can also end up with overdraft fees on top of everything else. This can leave you without the funds you need to pay for necessities like food, child care, and utilities. To top it off, you can also experience a deluge of calls and threats from debt collectors.
It all sounds extremely nasty, but there are ways to get help with payday loans.
How To Get Out Of Payday Loan Debt
As we have established, it is crucial to stop the vicious cycle of payday debt. There is help with payday loans, but it can be difficult to know where to start.
The best solution may depend on where you took the loan from. The laws governing payday loans vary from state to state. Some states, like Colorado, are in the process of changing the way payday loans are administered to make it easier for customers to repay loans and avoid the snowball effect of constant loan renewal. Other states require payday lenders to offer borrowers an Extended Payment Plan (EPP), which stops the accumulation of fees and interest.
Here is a closer look at some of the options available for getting rid of payday loan debt.
Extended Payment Plans (EPP): If you’ve borrowed from a lender that is a member of the Community Financial Services Association of America (CFSA), you may be in luck. The best practices of the CFSA allow a payday loan client the opportunity to enter into a PEP. This means that you will have more time to repay the loan (usually four additional pay periods) with no additional fees or added interest for this service. Best of all, you won’t be released to the collections until you default on the EPP. Here are the steps to follow if you want to apply for an EPP:
- Apply on time. You must apply for the PPE no later than the last business day before the loan matures.
- Sign a new agreement. If you took out your loan through a store, you will need to return to that location to submit your application. If you took out a loan online, you will need to contact your lender for instructions on how to sign your new agreement.
Credit counseling: If a PEP isn’t an option, you might want to talk to a credit counseling agency. While credit counseling agencies spend their time helping consumers get out of debt, these types of loans can present unique challenges. “This is not a traditional loan with set guidelines as to how they work with us,” says Fox. Despite these challenges, there are things a credit counseling agency can do to help you get out of payday loan debt:
- Restructure recovery. Fox says payday lenders who are CFSA members “seem to be more forgiving” and are “more inclined to try and work with people.” These lenders will often restructure to pay off (the balance) over six to twelve months when they go through our program. But he also adds that this only applies to around 40-50% of the payday debt situations clients face.
- Negotiate a settlement. If restructuring repayment terms is not an option, the credit counseling agency will try to work with the lender to determine a settlement amount that will completely resolve the debt. If you can pay off the loan with a lump sum payment (now is the time to ask mom or dad for help), the agency may be able to settle the debt for a percentage of the outstanding amount.
- Adjust your budget. If no other option is viable, the agency can work with you to establish a budget that will help you find the money to repay the loan. Sometimes that means reducing payments on other debts, consolidating debts, or resetting other expenses.
Bankruptcy: No one wants to resort to this option, but sometimes it is the only way out of this kind of debt. There is a myth that you cannot include payday loans in bankruptcy. However, this is not the case: “For the most part, payday loans are treated no differently in bankruptcy than any other unsecured loan,” writes lawyer Dana Wilkinson on the Bankruptcy Law Network blog.
Another unfounded claim is that you could be charged with fraud or arrested if you can’t pay off a payday loan or try to pay off the loan. One of the reasons this fear is so prevalent is that payday loan debt collection scammers often make these kinds of threats, despite the fact that these threats are illegal.
What to do after getting rid of payday loans
Once you are out of payday loan debt, you want to make sure you never go to a payday lender again. Some of the smartest things you can do to start cleaning up your credit include signing up for a free credit report. Regularly checking your credit is the best way to make sure you get rid of any mistakes. Plus, it is gratifying to see your credit score improve.
You can also sign up for a credit repair or look for a consolidation loan to help you pay off all your debts. This allows you to start moving in the right direction financially.
Getting out of payday loan debt can seem daunting, but it’s worth it and the hard work. Taking control of your finances – and being able to plan for the future – is a reward worth seeking out.
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Gerri Detweiler works to help people understand their credit and debt, and writes on these issues, as well as on financial legislation, budgeting, debt collection, and savings strategies. She is also co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well ashost from TalkCreditRadio.com. More from Gerri Detweiler