Getting out of payday debt is tough, but possible. Here’s how to get out of a payday loan nightmare.
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If your payday loan debt seems to never go away, despite your best efforts, you might be in what’s known as the ‘payday loan trap’ — a cycle of debt that’s so high it’s tough to escape.
According to statistics from the Consumer Financial Protection Bureau (CFPB) and research from the Pew Charitable Trust, the average annual percentage interest rate on a payday loan is 396%, with the average borrower spending $520 in interest and additional fees alone to borrow $375.
By nature, these loans tend to trap well-intentioned borrowers into a cycle of debt from which they can’t escape. Yet the 14,000+ storefront payday lenders, combined with endless online lenders, rake in $12 billion in fees every year. To get a sense of how horrible this industry can be, watch the video below by Bloomberg.
If you’re one of the 12 million Americans who have taken out a payday loan this year, you’re not alone. Here are a few steps you can take to help escape this trap.
Disclaimer: Credit Summit may be affiliated with some of the companies mentioned in this article. Credit Summit may make money from advertisements, or when you contact a company through our platform.
How to Get Out of Payday Loan Debt
1. Try a Payday Loan Consolidation/Debt Settlement Program
Consolidation programs are designed to take all of your payday loans and put them into a single payment plan. This can be the most effective option for reducing your payday loan debt, but there are lots of scams out there. We highly recommend DebtHammer, which specializes exclusively in payday loan consolidation, and only takes on clients they know they can help.
There are two types of payday loan consolidation. The first is an actual debt consolidation loan. In this case, a lender will give you a new loan at a new interest rate, which you can then use to pay off higher interest short term loans. If you do this route, the U.S. government recommends talking to a credit counselor so that you know what you’re getting into.
Payday loan consolidation programs — also called debt relief, debt settlement or debt consolidation programs — are a bit of a different beast. In this case, a third party will take all of your loans and the responsibility of repaying them and charge you a flat monthly payment. They will help you stop lenders from automatically drafting from your checking account (which will prevent overdraft fees) and negotiate directly with the lenders to devise a plan that works. Generally speaking, the total amount you will pay will be a fraction of what you would owe the payday lenders.
Ready to Consolidate Your Loans?
You might be able to reduce your loan amount by up to 80%.
READ MORE: How does debt consolidation work?
2. Prioritize High-Interest Loans First
Begin by laying out all of your loans. Take the time to read each loan agreement to understand
You should always try and pay back your highest interest loans first. Because of the way interest payments work, the more you owe, the more you owe.
If you have non-payday loans such as credit card loans, they should usually take a backseat as they have a significantly lower interest rate. Credit card debt is another problem, but it’s much lower interest debt than a payday loan.
It may take quite a bit of digging to find out what APRs you are paying with each loan, but it is well worth it to understand which of these have the highest interest rate so that you can prioritize them.
READ MORE: Best ways to eliminate credit card debt
3. Ask for Extended Payment Plans
Payday lenders may not be your friend, but they do want their money back. They may offer reduced terms or interest rates if you call them and tell them you can’t pay. Try not to speak to their debt collectors and instead someone who is a supervisor.
You can also ask if they offer extended payment plans (EPP). They may not, but it doesn’t hurt to ask. Be sure to ask a few people when you inquire because payday sales reps aren’t the most honest people around.
If your lender is a member of the Community Financial Services Association of America (CFSA), the chances that they offer extended payment plans is quite high. Be sure to ask before your loan’s due date — last business day at the latest.
Before you do sign a repayment plan, be sure to read and understand all of the terms. There’s no such thing as a free lunch, so they may replace one evil with another. An extended repayment period might come at the price of higher interest.
READ MORE: Payday loan extended payment plans
4. Sign up for a Cash Advance App
These apps, like Albert or Dave, offer small loans, but don’t charge interest or fees, aside from — in some cases — a small monthly fee. They usually only loan small amounts, ranging from $20 to $250, but that’s in line with a payday loan. The advances are then repaid from borrowers’ next paycheck. Cash advance apps make their money by asking borrowers to pay tips, but the tip is optional and can be set to whatever amount you’re willing to pay.
READ MORE: Best cash advance apps
5. See If You Can Qualify for a Personal Loan
Payday loans aren’t the only form of loans out there.
Second mortgages, home equity lines of credit (HELOCs), credit cards, and other personal loans are designed to pay down larger loans.
Credit cards often offer cash advances, but you may be out of luck if you have bad credit.
For most of these, you’ll need to have some credit history — probably a 580 credit score at a minimum. Check your credit report from one of the main credit bureaus — Experian, Equifax or TransUnion first — many services such as Credit Karma offer this for free. Be wary of other credit bureaus, as they tend to be more scammy.
READ MORE: Best personal loans for debt consolidation
6. Get a Payday Alternative Loan (PAL) from a Credit Union
Federal credit unions are financial institutions that tend to be smaller and less profit-oriented since they don’t have shareholders. They often offer “payday alternative loans” (PALs). Here are some facts about PALs, courtesy of NerdWallet:
- Issued to borrowers who have been credit union members for at least one month.
- Granted in amounts between $200 and $1,000.
- Affordable, with a maximum annual percentage rate of 28% and an application fee of no more than $20, reflecting the actual processing cost.
- Repaid fully after one to six months of installments; no rollovers allowed.
- Provided to borrowers one at a time; borrowers may not receive more than three PALs within six months.
NerdWallet also mentions that these loans are not very common; only 1 in 7 credit unions offer them. The best way to learn if a credit union offers these types of loans is to call them.
READ MORE: What is a Payday Alternative Loan?
7. Look into Nonprofit Credit Counseling
Finance is not easy, and payday loans are among the toughest to comprehend. A credit counselor is a personal finance expert who can help make sense of all the fine print and help you create a plan to get out of the debt cycle.
However, if you’re in payday debt, you’re probably not in a position to shell out a bunch of cash to a credit counseling agency. Fortunately, several nonprofits offer debt counseling and financial planning free of charge.
Many military bases, credit unions, local governments and universities offer some sort of credit counseling. It can’t hurt to call around to see what options are available to you.
Typically they are not going to have a silver bullet for you. But they can sit down with you, help you understand your financial situation, and set up a budget for you to help you get out of debt. The hard work is actually sticking to that budget.
Be very careful of companies masquerading as nonprofits. This world is full of scam artists. Do your homework to make sure that there is a real organization behind the offering. If something sounds too good to be true, it probably is.
For more information about choosing a credit counselor, visit this article by the Federal Trade Commission (FTC).
READ MORE: How credit counseling works
8. Ask Friends and Family for Money
One option for getting money to pay off your loans is to ask your friends, family, and community. It can be extremely humbling to do this, but a no-interest loan from a friend can go a long way in helping you get out of the payday loan trap.
Many churches, mosques and synagogues have support systems where members donate anonymously to help other members through tough financial situations.
READ MORE: Need help paying your electric bill?
9. Ask for a Pay Advance
If you have a good relationship and a strong history with your employer, asking for an advance can go a long way. Many employers will offer pay advances for employees who have proven themselves.
Be honest about your situation. Help your employer understand that the sooner you get paid, the less interest and fees you have to pay. Be sure to mention that the less stressed you are, the better you can do on the job.
Consider offering to put in extra hours, which will not only build goodwill but also make you more money. Especially if you get paid overtime.
10. Work Overtime
If you’re an hourly worker in the United States, you are entitled to overtime pay when you work over the standard workweek. Typically this means that you get 1.5 times your hourly rate for every hour worked over the normal workweek, usually about 40 hours.
You are making more, and you’re also making more per hour, which adds up fast.
11. Do Side Jobs for Extra Cash
There is no shortage of side jobs in today’s gig economy. Anybody can make a few extra bucks driving for Uber, walking dogs for Wag, or delivering food for Doordash. If you have the extra time, use it.
READ MORE: Easy ways to earn $500 fast
12. Avoid Taking on New Payday Loans
This is absolutely essential. Do not take on new payday loans!
Payday loan lenders are considered so predatory that there are several state laws in place that prohibit payday loans. They trap payday loan borrowers in a cycle of debt that can be extremely difficult to escape.
Do whatever you need to do. Save money, work overtime, borrow from friends and talk to a credit counselor, but do not fall back into the trap. The short-term relief is not worth the long-term debt you’re trying to pay off.
13: Learn from Others’ Mistakes: Payday Loan Nightmares
There are thousands of stories from people whose lives were upended by payday loans. Learn from their mistakes, and if you have no option other than a payday loan, make sure you make your payments as scheduled. Don’t expect a payday lender to show any sympathy if you can’t repay the loan as scheduled.
Laurie’s story: After successfully paying off two short-term loans, she took out a third with the intention of paying it back right away. Unfortunately, another financial issue came up and she was unable to repay it immediately. Payments ended up totaling $220 biweekly and she was told she would owe a total of $4,400 to repay a $1600 loan.
Shelly’s story: One lender deposited $600 into Shelly’s parents’ account without them asking. Since the m money was deposited — while her mother was in hospice — the lender was electronically withdrawing $152.55 twice a month. This means that for a $600 loan they will pay $3,203.55, for a loan they never requested.
Brandy’s story: When Brandy’s father passed away, she was distracted with funeral arrangements and not thinking about her payday loan. Her payment was two days late and she was charged an extra $300 in fees. When she told the lender why she was late with the payment, they just told her that her loan agreement required payment by a set date. “They had no care or sympathy that I had a tragedy in my life and they just wanted extra fees,” she said.
14. Start an Emergency Fund
Even a small emergency fund can be a big first step toward ditching payday loans for good. Even just $100 set aside can help if you need an emergency car repair or have a financial setback.
READ MORE: Easy ways to save money around your home
15. Learn From the Experts
Contrary to the claims of many other money-advice sites, personal finance is a difficult subject. There are dozens of problems to keep track of, and the stakes are as high as can be. It’s also deeply emotional, and many of us inherit baggage about money from our parents and environment during childhood.
The proof is in the numbers. Americans consistently fail to reach their financial goals. The average citizen holds $25,483 in non-mortgage debt and saves less than 8% of their income. A recent study showed that a staggering 77% of Americans feel stressed and anxious about their finances.
It shouldn’t be a surprise. The American educational system does a poor job of helping people understand how to manage money. Many Americans go their entire lives without taking a single class on budgeting, taxes, or managing credit. Many don’t understand why a FICO score is important.
It sets all but the most privileged up to fail.
Taking the time to remedy the gap in your education will do wonders to protect you from the pitfalls of personal finance.
READ MORE: Got $50,000 in debt? Here’s how to pay it off
The Bottom Line
Getting out of the payday debt trap is not easy, but it is the first step to ensuring a future of financial freedom. Once payday loans are no longer hanging over your head, you’ll feel better and have the freedom to begin planning the financial future you deserve. Being debt-free with money in your bank account is worth the hard work.
READ MORE: Step-by-step guide to payday loan consolidation
Some, but not all payday lenders will negotiate with you. At the end of the day, they care most about getting their money back. Some have a strict no-negotiation policy, and others will only negotiate if you stop payments and can demonstrate that you really can’t pay. Either way, it does not hurt to ask.
Do be careful that what you renegotiate isn’t worse than the original loan.
This is a bad idea and not a great way to get out of debt. The lenders will report that you defaulted to the credit bureaus and may take you to court.
Unfortunately, the government offers very little to those struggling with payday loan debt.
The CFPB has put together a bit of content around payday loans and has been working on implementing better regulation. However, the federal government does not help you specifically, though some state governments have passed laws cracking down on payday lenders and limiting the interest rates they can charge.
If you need payday loan help, your best bet is to talk to a credit counselor or try a payday relief program.