For the more than 12 million Americans who take out payday loans each year, the debt doesn’t end with their next paycheck. In fact, data from the Consumer Finance Protection Bureau shows that over 80% of payday loans are rolled over within 14 days, and the majority of these subsequent loans are for amounts equal to or greater than the original. This is because these loans often charge exorbitant interest rates, engulfing borrowers in a vicious circle of interest payments and poverty. And if you don’t repay them, there can be serious financial consequences.
There are options to escape predatory lenders and regain control of your financial life.
Alternatives to payday loans
Before taking out a payday loan, you should exhaust all available options, such as asking your employer for an advance, borrowing money from friends or family, or selling unused items. But be aware that there are also other borrowing options with lower interest rates and fees that may be available to you.
Here are some loan options:
Personal loans, such as those offered by your bank, credit union or online lenders, are usually repaid over two to three years, with interest rates based on your credit history, but usually at 36% or less. The amount of a personal loan can vary, but can range from around $800 to $30,0000. If used wisely, a personal loan can build credit and help you consolidate other higher interest debt, such as credit cards. On the other hand, if you already have debt problems, personal loans can make your problems worse. Still, they are a better choice than payday loans, which can have interest rates as high as 400%.
Alternative payday loans, which may be offered by credit unions to their customers, typically have interest rates well below 20% and offer a total loan amount typically below $800.
Finally, if you have an available line of credit, it’s best to use an existing credit card. Even with an interest rate of up to 36%, it’s far better than a payday loan.
How to manage an existing payday loan
If you’re already tied to a payday loan, understand the options available to you.
In many states, an extended payment plan may be available, allowing you to make lower monthly payments. However, this type of plan does not exist in all states, so ask your lender if this option exists in your area. Also, the extended repayment plan can usually only be used once a year, which means you shouldn’t expect to renew your loans and continue to enjoy extended repayment.
Second, if you have access to one of the loan alternatives listed above, you can consolidate your payday loan into a credit card, credit union loan, or personal loan at a lower interest rate.
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Third, try to negotiate a direct solution with your lender, and if that’s not possible, you can file a complaint with the state regulator or the Consumer Financial Protection Bureau. Although lenders have no responsibility to answer them, state regulators or the CFPB may be able to provide you with valuable information to negotiate your situation.
You can also ask to work with a debt management plan. These are credit counseling agencies that try to negotiate lower interest rates with your lenders, reducing the total amount of interest you pay. In turn, you send the credit counseling agency a one-time monthly payment which they in turn use to settle your debts. However, working with a debt management plan may require you to stop using credit cards during the program and may affect your credit. These agencies may also charge a monthly fee of around $25 to $75, as well as a plan setup fee. However, the initial assessment session is usually free and worth pursuing, if only to better understand your options.
Likewise, filing for bankruptcy can eliminate almost any debt (with notable exceptions, such as student loans), but it will have long-term consequences for your credit. Although bankruptcy is rarely pretty, it can offer a definitive exit for borrowers trapped in an endless cycle of high-interest debt and deteriorating financial options.