Payday loans are a $9 billion business, and with their exorbitant interest rates, they prey on borrowers in need of quick cash. Payday loans are easy to access and can lead many borrowers into a downward cycle. If that’s you, there are steps to escape the payday loan trap.
The dangerous part is how easy payday loans are to access. These lenders hide out in every strip mall, all over America, and you’ve seen the signs… “NEED CASH TODAY? NO CREDIT NEEDED!”
Say you just need $200 or so to get you through the end of the week – for things like groceries and gas – that sign can look like a beacon of light.
It begins innocently enough, but for many payday loan borrowers, it can be a slippery slope because payday loans are inherently difficult to get out of.
If you’ve never taken one out, this article will open your eyes to the seedy world of payday loans, from what they are to how they work. And, for anyone who needs it: how to escape the payday loan trap.
First, what are payday loans?
Payday loans are a short-term cash advance loan. The “payday” part comes from you ideally being able to pay them back when you next get paid. Lending periods are typically 7-14 days.
Taking out a payday loan is really, really easy because all you need is an I.D., an active checking account, and proof of income. You can walk into a payday loan storefront (or go online) and have a loan in as little as 15 minutes. All it usually takes is just writing a postdated check to the lender for the amount you are borrowing plus a fee, which can be anywhere from $35-$75.
Here are some quick payday loan facts and statistics:
- The median payday loan amount is $350
- 69% of borrowers use them to cover recurring expenses
- Some states cap the principal at $500
- 13% of divorced or separated individuals have taken out a payday loan
- Disabled Americans borrow at the highest rate
- 5.5% of all Americans have taken a payday loan
- Until recently, Ohio had the highest payday loan interest rate at 667%
If you’re interested in reading more about payday loans, the Pew Charitable Trust, Consumer Financial Protection Bureau, and Center for Responsible Lending have done collected a ton of information on them.
Why is it so hard to escape the payday loan trap?
Did you see that last statistic about the interest rates in Ohio? High-interest rates like that are pretty much standard across the U.S…. 460% in California, 661% in Texas, 404% in Illinois…
To understand those rates, here’s a little more info on how payday loans work.
The lender will need a postdated check from an active bank account, and you’ll write that check out for the amount you are borrowing plus a fee. BUT, if you know you won’t have the funds in your checking account to cover that check, you’re likely to take out another payday loan to cover the first one. As you do that over and over again, that fee is annualized into those insane interest rates.
Payday loans give shady lenders direct access to your bank account. It’s as if they are holding the rest of your expenses hostage until you can finally pay, which can take months.
This cycle is so bad that one-third of borrowers will take out 11 to 19 payday loans each year. Payday lenders make 76% of their fees from those borrowers alone.
There’s clearly a problem, and even though cutting expenses and increasing income may be an option for some people, many borrowers will need more help getting out of the payday loan trap.
M$M tip: Read more at 11 Strategies You Can Use to Pay Off Massive Debt
How to escape the payday loan trap
The reality is that depending on the state you live in, it can be more or less difficult to escape that debt cycle. Still, let’s go over some of the steps you can take.
See if your state requires payday lenders to offer an Extended Payment Plan (EPP). Rather than continuing to re-up your loan, which increases the amount you will pay, some lenders must give you the option to extend the period of your initial loan.
An EPP generally allows for four extra pay periods without any additional fees or interest added onto your loan. You will have to apply for this no later than the last business day before the loan is due, and you will need to return to where you borrowed from in the first place to apply for the EPP.
Contact regulators in your state if a lender won’t work with you on an EPP. This won’t always work because laws vary from state to state, but some state regulators will help renegotiate on your behalf for an extended plan.
File a complaint at the state or federal level with the Consumer Financial Protection Bureau if lenders still won’t work with you. While this may not help you get out of a payday loan trap, formal complaints are one of the ways that future regulations are passed.
When all else fails, finding an alternative lending source might be the next step. These aren’t going to be easy solutions or quick fixes, but if it feels like you are out of options, there are a few places to look for support.
Alternative lending sources for payday loan relief
This is a service offered by non-profit organizations that helps borrowers learn to manage their finances in a healthier way – it’s not financial relief from your payday loan. And, before you sign up for a credit counseling service, do your research to avoid scams.
A reputable credit counseling service may be able to help you:
- Restructure your payback
- Negotiate a settlement on your behalf
- Create a budget that allows you to repay your loans
Debt management or debt settlement plans
These are third party, for-profit companies that will either help you set up a new repayment plan or help you borrow a lump sum amount to cover the cost of your loans. Both will extend your loans, but at a lower rate with more manageable payments.
Like with some credit counseling services, there are scams out there. Companies on both ends of this industry, the payday lenders and relief options, benefit when you don’t pay your loans on time. Do your research with an organization like the Federal Trade Commission before moving forward.
Take out a personal loan
Unfortunately, many payday loan borrowers fall into the trap because they either have really bad credit or none at all, and that makes borrowing money from legit lenders really difficult. The other bummer is that many payday borrowers are already living paycheck-to-paycheck, so paying back loans of any kind is going to be difficult.
Still, taking out a personal loan is included on this list if you’re able to do a couple of things:
- Find a cosigner who is willing to deal with the possible repercussions
- Find a way to increase your income so that loan payments are possible
Yes, the dreaded B word. This could be a last ditch effort to save your finances from the payday loan trap, but it should not be entered into lightly, at all. There are huge, HUGE consequences and should only be looked into if you’ve exhausted every other possible option.
How to stay out of the payday loan trap
It would be nice to say “never take out another one again” and leave it at that, but that’s easier said than done. The fact that most borrowers fall into this cycle because of a lack of resources and/or zero to poor credit means there is a lot of work to be done.
But, here are a few ideas:
- Start building your credit. Self Lender is a potential option for those with zero credit, but there are other free ways to increase your credit score, which you can read about at How to Fix Your Credit Score Quickly.
- Cut your expenses. Depending on where you currently stand, this might be difficult, but examine your budget to see where you can cut your monthly spending.
- Keep track of your budget. Good financial health starts with knowing how much money is coming in and going out each month. The internet has a ton of free budgeting apps that can help you build and stick to a budget
- Increase your income. You might be surprised how easy it is to find an extra $100 to put towards your expenses or use to build an emergency fund.
My final word on payday loans
The world of payday lending is super shady and it feeds on income insecurity, but there are also too many underlying political factors to unpack on a site like this. Taking out a payday loan probably isn’t something anyone wants to do, but escaping that cycle is.
Know that it can be done. It won’t be easy and it may take what feels like superhuman strength to overcome, but know that you don’t have to live with this kind of debt forever.
The M$M site is here to help you with motivation and support as you destroy that debt and work towards a better financial future.