Getting a payday loan is usually a quick and simple solution to hold you over until your next payday. Most payday lenders don’t require a credit check, meaning you can secure one even with a bad credit score. Payday loans generally come with high interest rates that can create a vicious cycle of debt.
Understanding the payday loan trap and getting payday loan debt assistance
More than 80% of payday loans are rolled over or renewed, according to a 2014 study by the Consumer Financial Protection Bureau (CFPB). The CFPB recently rolled back regulations governing payday loans. These rollbacks potentially make payday loans more widely available than ever.
Along with high interest rates and the often-used practice of rollovers and renewals, payday loans also come with short repayment periods (typically two weeks, or the time between paychecks for a borrower).
There are two ways to extend payday loans, but they both lead to cost increases. The less extreme version involves paying the interest charge, or some other fee, on the loan in full on the due date. In this case, you’re extending the loan without paying down your debt at all. You’ll owe the total amount on the original loan two weeks later.
In the more extreme alternative, the borrower makes no payment, except possible fees. They take out a new loan for the total of the original loan plus the interest owed on the original loan. Then a new interest charge is applied to the new total.
In either scenario, falling down the payday loan debt rabbit hole can easily happen.
What happens if you can’t pay your payday loan?
If your payday loan is due, and you don’t have the money, here are your options for moving forward.
Renew or roll over the loan
Renewing or rolling over your payday loan typically means you pay a fee to delay repayment of the loan. But you still owe the original amount of the loan, including associated fees. This is often how the payday loan trap begins.
Non-sufficient funds (NSF) and overdraft fees
With a payday loan, you’re generally given the option to repay with a personal check or with an automatic withdrawal from your bank account. If you choose the latter option, you should watch your account closely.
If you have non-sufficient funds (NSF) the first time the lender tries the withdrawal, they may attempt to make withdrawals for smaller amounts to reclaim at least some of what they’re owed. You could get hit with an insufficient funds fee from your bank each time the lender tries and fails to make a withdrawal. Too many of these can ultimately lead to your bank closing your account.
Different states offer different protections on fees.1
Default on the loan
If you’re unable to repay the loan or the fee to renew or roll over the loan, you’ll reach delinquency. And if the cycle continues, you’ll be in default. Payday borrowers wind up defaulting on loans 20% of the time, according to the CFPB.
If you default on the loan, the lender can send your debt to collections. This creates a negative ding on your credit report, which can lead to difficulty borrowing in the future.
Choosing a payday loan debt assistance solution
Depending on your financial situation, there are different approaches to trying to get out of payday loan debt.
Create a budget and adjust
The first step for most borrowers is to create a budget. If you’re able to reduce some of your expenses, you may find that you’re able to put that money toward your payday loan debt.
The general rule of thumb for budgeting is the 50/30/20 rule. With this strategy, you put 50% of your monthly after-tax income toward necessities. This includes rent/mortgage, utilities, groceries, insurance, and anything you need to live. Another 30% should go toward wants, like streaming services or cable. And the last 20% should go toward savings and paying off debt.
Ask about an extended payment plan (EPP)
Some lenders offer extended payment plans, or EPPs. Members of the Community Financial Services Association of America (CFSA) are required to offer EPPs at no cost to the borrower.2
An EPP gives the borrower more time to repay the loan without incurring any fees and keeps the loan from going to collections.
Restructure your other debt
If you’re unable to get payday loan debt assistance in the form of an EPP from your lender, consider reaching out to your other creditors for help. You may be able to restructure other forms of debt like credit card debt, student loan debt, or auto loan debt. This approach could help you free up money to put toward your payday loan.
Pay off payday loan debt with a debt consolidation loan
A debt consolidation loan could be an option to help end your payday loan debt. This could mean using a personal loan, balance transfer credit card, home equity loan, or home equity line of credit (HELOC).
Contact a faith-based organization
There are several nonprofit, faith-based organizations that focus on ending predatory payday lending. Faith for Just Lending is a coalition of such organizations3 that may be able to provide payday loan debt assistance.
Seek military relief
The Military Lending Act protects active-duty servicemembers and their families from predatory lenders. The act includes a Military Annual Percentage Rate (MAPR) that prevents lenders from charging more than 36% interest.
Get credit counseling
You can meet with a credit counselor if you need help with payday loan debt. Credit counselors evaluate your income and expenses to help you create a plan to pay down your debt. In extreme scenarios, you may be advised to create a debt management plan (DMP).
With a DMP, you’ll work with a credit counselor to negotiate with your creditors to try to get better terms. You pay the credit counseling service each month after you’ve determined a monthly payment. Then the credit counseling agency pays your creditor. Be mindful to work with a reputable credit counseling agency to avoid getting ripped off.
Get a loan from family or friends
If you can’t get a loan on your own, you may be able to turn to a friend or family member for help. Theoretically, you’ll be able to eliminate interest, or at the very least pay a much smaller interest rate than you’d normally face with a loan.
An extreme way to eliminate payday loan debt: Bankruptcy
As an absolute last resort, you can file for bankruptcy. A credit counselor can help you determine if bankruptcy is necessary for your financial situation. They can also help you decide whether you should file for Chapter 7 or Chapter 13 bankruptcy. Bankruptcy stays on your credit report for many years, which can hurt your credit score.
What to do after getting out of payday loan debt
Regardless of how you get out of payday loan debt, be sure to take steps to avoid a similar situation in the future. Building an emergency fund is a good first step. You should also check your credit score and work to improve your score. This will help you qualify for more affordable credit.
Be patient as rebuilding your credit can take several months or even years. If you find yourself needing another short-term loan and are a member of a credit union, consider a payday alternative loan (PAL).
Ultimately, payday loans should be avoided at all costs.