Nobody likes being in debt, but it’s even worse when there seems to be no way out.
This is how the 12 million Americans who take out payday loans each year generally feel. It’s understandable, considering they’re paying about nine billion dollars in loan fees. But there’s 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 money fast but don’t have the kind of credit or collateral required for a more traditional loan. Usually, the only requirements to qualify for a payday loan are an active bank account and a job. Companies like MaxLend, RISE Credit, and CashMax have made art of providing high-interest loans to people who feel desperate and out of 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’s not short term. Although payday loans are advertised as quick, short-term loans, the average borrower is in debt for a full five months each year.
- Loan fees 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 day-to-day expenses, like groceries, gas and rent, rather than emergencies.
- It’s a vicious circle. To fully repay a loan, the average borrower would have to pay over $430 on the next payday following the loan. Because it’s 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 payday loan?
As with any other loan, failure to repay a payday loan can result in increased 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 may 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, childcare, and utilities. To top it off, you may also experience a deluge of calls and threats from debt collectors.
This all sounds extremely unpleasant, 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 loan debt. There is help for payday loans, but it can be difficult to know where to start.
The best solution may depend on where you took out the loan. Laws Governing Payday Loans vary from state to state. Some states, such as Colorado, are working to change 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 a Extended Payment Plan (EPP)which stops the accumulation of fees and interest.
Here’s a closer look at some of the options available to get rid of payday loan debt.
Extended Payment Plans (EPP): If you borrowed from a lender that is a member of the Community Financial Services Association of America (CFSA), you may be in luck. CFSA Best Practices give a payday loan client the option of entering into a PEP. This means you will have more time to repay the loan (usually four additional pay periods) with no additional charges or added interest for this service. Best of all, you won’t be returned to collections until you default on the PPE. Here are the steps to follow if you want to apply for PEP:
- 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 storefront, you will need to return to that location to submit your application. If you took out a loan online, you’ll need to contact your lender to find out how to sign your new agreement.
Credit advice: If a PPE is not an option, you may want to speak with 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. “It’s not a traditional loan with set guidelines for how they work with us,” Fox explains. Despite these challenges, there are things a credit counseling agency can do to help you get out of payday loan debt:
- Restructure repayment. Fox says payday lenders who are members of the CFSA “seem to be more forgiving” and are “more willing to try to work with people.” These lenders will often restructure to repay (the balance) over six to twelve months when they go through our program. But he also adds that this only applies to about 40-50% of payday debt situations clients face.
- Negotiate a settlement. If restructuring the 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 repay the loan with a lump sum payment (this 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 needed to repay the loan. Sometimes that means reducing payments on other debts, consolidating debts, or reprioritizing other expenses.
Bankruptcy: No one wants to resort to this option, but sometimes it’s the only way to get out of this kind of debt. There is a myth that you cannot include payday loans in bankruptcy. However, that is not the case: “For the most part, payday loans are not treated any differently in bankruptcy than any other unsecured loan,” writes attorney Dana Wilkinson on the Bankruptcy Law Network Blog.
Another unsubstantiated allegation is that you could be charged with fraud or arrested if you can’t repay a payday loan or if you try to repay the loan. One of the reasons why this fear is so widespread is that payday 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 get rid of your payday loan, 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 file. Regularly checking your credit is the best way to make sure you eliminate any errors. Plus, it’s rewarding to see your credit score improve.
Getting out of payday loan debt can seem daunting, but it’s worth the effort and hard work. Taking control of your finances – and being able to plan for the future – is a reward worth pursuing.
Credit.com is a USA TODAY content partner offering personal finance news and commentary. Its content is produced independently of USA TODAY.
Gerri Detweiler is dedicated to helping people understand their credit and debt, and writes about these issues, as well as financial law, 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 Gerri Detweiler