Most of us know the payday loan is by far one of the worst financial choices a person can make. The really terrible thing about them is that often, if you’re taking out a payday loan, you don’t feel like there are any other choices available.
If you’ve borrowed money from a payday lender, you need to know how to get out of payday loans. Compared to other forms of debt (even credit card debt), they have the potential to be the most dangerous. Once you get out of a payday loan, there are much better alternatives to consider.
What Is A Payday Loan?
Payday loans don’t have a technical definition, but generally, they’re high-fee, short-term loans of relatively low amounts. The Consumer Financial Protection Bureau (CFPB) says that most payday loans are for $500 or less.
Typically you have to repay the money when you get your next paycheck (hence the name). Many people take out payday loans from a storefront location, but some states also permit online payday lending.
There are desperate situations where it might be necessary to go to a payday lender to help you squeak by. After all, plenty of folks don’t have a strong emergency fund, and if you get hit with a major car repair or other bill that must be paid promptly, a payday loan can seem appealing.
Why Payday Loans Are So Terrible
Now, a lot of aspects of personal finance are totally personal, and a product or plan that may work for one person could be an awful option for someone else. But payday loans are one of the few things that finance experts agree on—they’re terrible!
(Please understand, this is a critique of the payday loan system in general, not of anyone who has needed these loans.)
Payday loans are just terrible for the borrowers and should only be used as an absolute last resort.
Here’s why you should avoid these if possible:
- Fees are astronomical: they can equate to 400% APR or more on the amount borrowed. Late fees can add even more to your total owed.
- Many states don’t have restrictions on interest rates.
- Payday loans don’t help you build your credit score.
- It’s much too easy to be sucked into a cycle of borrowing, then borrowing again, until your paycheck is consumed.
Payday Loan Fees
According to the CFPB, the fees on payday loans may vary from $10-$30 per $100 borrowed, depending on state laws. Let’s say you go to a payday lender that charges $15 per $100 borrowed.
That means you’d pay $60 to borrow $400 to get you through until your next payday. In two weeks (or possibly four weeks for some loans), you’d need to pay back $460 to the lender. Quite a chunk of change just to make it to payday!
Quite a few states don’t cap the interest rates on their payday loans, so the rates can be astronomical. (The average rate in Texas is 664% on a $300, 14-day loan! And you thought credit card rates were bad.)
Even states with restrictions can be terribly high, much more than rates on personal loans or credit cards. The Center for Responsible Lending has an updated U.S. map you can check out to see where your state falls in payday lending rates.
Payday Loan Rollovers
Some states allow borrowers to take a “rollover” if you don’t have enough money to cover the loan repayment on time. You’d still pay the fee, but the lender would roll over your original balance (say, $400) for an additional two weeks. Then, after you get your paycheck deposited, you’d repay the original loan balance plus another fee of $60 for the extra time.
Rollovers may seem like a great deal, but they are a means of keeping you trapped in ever-increasing debt. The longer you delay paying back the payday loan, the more charges you’ll be responsible for, and the harder it will be to pay it off in full.
How to Get Out of Payday Loans For Good
So, let’s talk about how to get out of payday loans! Well, there’s no magic bullet here—you usually need to pay back the loan balance, plain and simple.
But here are some tips for how to pay off your payday loans and avoid them in the future:
- Scrimp and pay back your payday loans and their fees as soon as possible.
- Talk to the lender about a repayment plan that might have lower fees—it’s worth a shot!
- Use lower-interest debt to pay off the loan, like borrowing from a friend or taking out a personal loan.
- Commit to never borrowing from a payday lender again. It’s too tempting and will only lead to more of your upcoming paycheck being used up.
- Debt settlement or bankruptcy could be an option in extreme cases.
There are a few alternatives to payday loans for those times when you urgently need funds for just a short period of time.
- Hustle! I know, you may already be busting your butt to make ends meet, but if there’s any window of time when you could earn some extra money through a side hustle, use it to get out of payday loans quickly.
- Use lower-interest forms of credit, like a low-interest credit card.
- Some credit unions offer payday alternative loans (PALs) for $200 to $1,000. You need to have been a member of a credit union for one month before taking out a PAL. Loan terms range from 1 to 6 months.
- Check with state or local governments to see if they offer any financial assistance.
- Negotiate a payment plan with your original creditors. Some of them may be willing to arrange for a slower repayment schedule that eases the financial pressure you’re under.
Also, if you’re really struggling to pay your bills, as many of us do at one point or another, it might be a good idea to try credit counseling. Many credit unions offer credit counseling for free. Talking with an expert could help you to learn how to manage your money better, follow a budget and start saving.
Bottom line: payday loans look appealing, but they’re a high-interest trap you need to avoid. Be sure to pay them off ASAP and use these better options to bridge any future gaps in your income.
Have you ever taken out a payday loan? Did you get trapped in the debt cycle?
AUTHOR Kate Underwood
Kate Underwood loves reading, talking, and writing about all things in personal finance. She made the switch from her high-school teaching career a few years ago to become a full-time freelance writer and editor and can be found at kateunderwoodwriter.com.