Payday loans exist on the fringes of consumer lending. They're legitimate loans, but have a reputation for extremely high interest rates that can quickly drag borrowers down rabbit holes of debt. Yet NBC News reports that about 12 million people resort to them each year in the United States. Four out of five of these loans are rolled over into new ones within two weeks, creating a debt trap that can be difficult to climb out of.
Don’t Roll The Loan Over
Payday loans become dangerous when borrowers are unable to pay back the full amount on the due date. If you borrow $500, you'll most likely have to pay back somewhere in the neighborhood of $650 a couple of weeks later -- the original loan amount, plus fees and interest. If you ask for an extension, another $150 in interest and fees may be charged. This can happen each time you have to roll the loan over until it is satisfied in full.
Dave Ramsey advises never taking out a payday loan in the first place. If you do, avoid a rollover if at all possible. Borrow from family or friends to pay off the loan on the first due date if your paycheck won't cover it. Sell something you own or ask your boss for an advance.
Take a Credit Card Cash Advance
Andrews Federal Credit Union advises taking a cash advance on a credit card if you have one that's not maxed out. Use the money to pay off the payday loan. Cash advances typically charge high interest, but nowhere near what a payday loan does. In addition, you'll have longer to pay the balance off.
Ask for an Installment Plan
You may be able to make arrangements to pay the loan back in smaller installments rather than in one lump sum. This can be more manageable than rolling the payday loan over into another short-term, lump-sum arrangement that will be due before you know it. Some states, such as Washington, don't allow lenders to tack on extra fees for installment plans. Interest may keep adding up until the loan is entirely paid off, however.
Tighten Your Financial Belt
If all else fails, try tightening up your budget to free some money to pay back the loan sooner rather than later. Don't spend money on anything that isn't absolutely necessary. Make minimum payments on credit cards for the time being until you can dig out of the payday loan cycle. Call your utility companies, your auto lender, landlord, mortgage company -- anyone you owe money to a monthly basis. Try to work something out to skip a month's payment without your financial roof falling in, or at least to make a partial payment. Use the funds you've freed up to get rid of the payday loan. You may be playing catchup with those other bills next month, but they won't be charging you interest at the rate of triple digits.
You might also considering picking up extra hours at work or taking on a second job. If you've fallen behind with bills because you're living a bit beyond your means, it may be time to make some adjustments. Seek help from a credit counseling service to get back on track.
File for Bankruptcy
Filing for bankruptcy might seem like a last resort, but if you're deeply in debt with other sources, it may be your answer. Payday loans are dischargeable in bankruptcy. Bankruptcy offers an automatic stay that freezes collection efforts from all creditors, including payday lenders, as soon as you file. Assess the extent of your debt and if you're in deeper than owing a payday loan or two, talk to a lawyer or consult legal aid to explore your options.
- NBC News: Feds Plan Payday Loan ‘Debt Trap’ Crackdown
- Andrews Federal Credit Union: Avoiding the Payday Lending Trap
- WashingtonLawHelp.org: Payday Loans -- What to Do If You Get Caught in the Debt Trap
- Dave Ramsey: A Game You’ll Never Win -- The Payday Loan Trap
- The Hilla Law Firm: Can I Discharge Payday Loans in Bankruptcy?