Nobody likes being in debt, but it’s even worse when it seems like there’s no way out. Twelve million Americans turn to payday loans every year, spending $9 billion on loan fees, according to a recent report by the Pew Charitable Trusts, because few of these loans are paid off by their due date. In fact, the Consumer Financial Protection Bureau notes more than 60% of borrowers end up trapped in payday loan debt, rolling over the loan so many times that they end up paying more in fees than their initial loan amount.
But there is hope—you don’t have to be stuck in the payday loan debt cycle forever. There are a number of strategies that can help you break the payday loan cycle.
Why it’s so easy to get buried in payday loans
Payday loans are unsecured personal loans targeted at people who need money fast but don’t possess the type of credit or collateral required for a more traditional loan. Usually the only requirements to qualify for a payday loan are an active bank account and a job. Companies like MaxLend, RISE Credit, and CashMax have made an art out of providing high-interest loans to people who feel desperate and out of options.
Also read: More banks are trying to get a piece of the payday loan pie
The very structure of payday loans is set up to keep people on the hook. Here’s a breakdown of what payday loan debt looks like, according to the Pew Charitable Trusts:
- It’s not short-term. Although payday loans are advertised as quick, short-term loans, the average payday loan borrower is in debt for a full five months each year.
- Loan fees are huge. Average loan fees are $55 every other week, and the average borrower pays $520 a year for multiple loans of $375.
- People borrow for the wrong reasons. Most payday loan borrowers—70%—spend the money on everyday expenses, like groceries, gas, and rent, rather than on emergencies.
- It’s a vicious cycle.To totally pay off a loan, the average borrower would need to fork over $430 the next payday following the loan. Because that’s a big chunk of change, most people end up renewing and extending the loan. In fact, 80% of all payday loans are taken out two weeks after another one was paid in full.
Read: People are taking out personal loans to pay for their vacations
What happens if I don’t pay my payday loan?
As with any other loan, if you default on a payday loan, it can result in growing fees, penalties, and possible legal action. Because many payday loans use automatic debit payments to take funds directly out of a bank or prepaid account, you can also end up with overdraft fees on top of everything else. This can leave you without the funds you need to pay for necessities like food, child care, and utilities. To top it all off, you may also experience a barrage of calls and threats from debt collectors.
This all sounds extremely unpleasant, but there are ways you can get help with payday loans.
How to get out of payday loan debt
As we’ve established, it’s crucial to stop the vicious cycle of payday loan debt. There is payday loan help, but it can be hard to know where to start.
The best way out can depend on where you took out the loan. Laws governing payday loans vary from state to state. Some states, like Colorado, are currently working to change the way payday loans are administered to make it easier for customers to pay loans back and avoid the snowball effect of constant loan renewal. Other states require payday lenders to offer borrowers an Extended Payment Plan (EPP), which stops the accrual of fees and interest.
Here’s a closer look at some of the options available to get rid of payday loan debt.
Extended payment plans
Extended payment plans allow borrowers to pay back the loan in installments for a longer period than their original loan agreement. Setting up an extended payment plan involves contacting the payday lender to work out an arrangement. While setting up the plan doesn’t typically involve a fee, defaulting on the payment plan can come with fees and penalties.
If you borrowed from a lender who is a member of the Community Financial Services Association of America (CFSA), then you may be in luck. CFSA’s Best Practices allow a payday loan customer the option of entering into an EPP. This means you’ll have more time to repay the loan (usually four extra pay periods) without any additional fees or interest added for that service. Best of all, you won’t be turned over to collections as long as you don’t default on the EPP. Here are the steps to follow if you want to apply for an EPP:
- Apply on time. You must apply for the EPP no later than the last business day before the loan is due.
- Sign a new agreement. If you took out your loan through a storefront location, you’ll have to go back to that location to turn in your application. If you took out a loan online, you’ll need to contact your lender for instructions about how to sign your new agreement.
Contact state regulators
If payday lenders refuse to work with you on an extended payment plan for your debt, contacting the agency that regulates lenders in your specific state could be helpful. State regulators may be able to help negotiate a payment plan with licensed lenders of payday loans. They may also take action against unlicensed lenders of payday loans.
File a complaint
Filing a formal complaint against the payday lending company if it refuses to work with you on a payment plan creates an official record of the situation. Complaints can be filed with state regulators as well as on a national level with the Consumer Financial Protection Bureau.
Find an alternative lending source
Payday loans can be paid back from money borrowed from a different source, such as a credit union or family member. Alternatives to payday loans don’t erase the debt, but they may have more agreeable terms and interest rates. A variety of different loans are available for numerous financial scenarios. One could be useful in helping you escape the payday loan trap if your credit qualifies you.
If an EPP isn’t an option, you may want to talk with a credit counseling agency. Credit counseling aims to help consumers better manage their finances, and a number of reputable organizations exist across the country. Services can include help with payday loan debts, budget creation and money management. Credit counseling is usually offered by many nonprofit organizations.
Credit counseling won’t erase your debt, but it can provide ongoing strategies for better management of it. Not every credit counseling organization is reputable, however, so it’s important to do your research when investigating this option.
While credit counseling agencies spend their time helping consumers get out of debt, these kinds of loans can present unique challenges. “It’s not a traditional loan with set guidelines in terms of how they work with us,” explains Fox. Despite those challenges, there are things a credit counseling agency can do to help you get out of payday loan debt:
- Restructure the payback. Fox says that payday lenders who are members of the CFSA “seem to be more lenient” and are “more apt to try to work with people.” Those lenders will often “restructure to pay back (the balance) over six to 12 months when coming through our program.” But he also adds that this applies in only about 40—50% of the payday debt situations clients are dealing with.
- Negotiate a settlement. If restructuring the payback terms isn’t an option, the credit counseling agency will try to work with the lender to determine a settlement amount that will resolve the debt altogether. If you can pay off the loan with a lump-sum payment (this is the time to ask Mom or Dad for help), the agency may be able to settle the debt for a percentage of the outstanding amount.
- Adjust your budget. If no other options are viable, the agency can work with you to come up with a budget that will help you find the money to get the loan paid off. Sometimes that means reducing payments on other debts, consolidating debts, or reprioritizing other expenses.
Debt management plans
A Debt Management Plan (DMP) is a debt-relief option offered through debt counseling agencies and debt management companies. They work with your creditors to come up with a monthly payment solution that works for your situation. Each month, you’ll deposit money into an account with the agency, which is then used to pay off your bills.
Making regular payments is a must, and consumers must refrain from using credit cards while in the program. The Federal Trade Commission urges consumers to carefully review DMP terms and ensure creditors are willing to work within its confines before jumping in. Keep in mind this isn’t a quick fix. Paying off debt through a DMP can take years depending on how much debt you have.
Debt settlement programs
Debt settlement programs are generally set up by for-profit organizations, which negotiate with creditors on your behalf to pay a “settlement.” This settlement consists of a lump sum of money that is less than the full amount owed. Debt settlement programs require you dedicate a certain amount of money each month to paying into the settlement, until the full amount is reached.
If you’re considering this option, be sure to do your homework and ask a lot of questions.
Nobody wants to resort to this option, but sometimes it’s the only way to get out from under this kind of debt. There is a myth out there that you can’t include payday loans in a bankruptcy. However, that is not the case: “For the most part, payday loans aren’t treated any differently in bankruptcy than any other unsecured loan,” writes attorney Dana Wilkinson on the Bankruptcy Law Network blog.
Another unsubstantiated claim is that you may be charged with fraud or arrested if you can’t pay a payday loan back or if you try to discharge the loan. One of the reasons this fear is so widespread is that payday loan debt collection scammers often make these kinds of threats, despite the fact that these threats are illegal.
Filing for personal bankruptcy may be an option if your debt is completely out of control, but keep in mind that it comes with some serious consequences. While bankruptcy may help you escape payday loans and other debts owed, it also means a huge blemish on your credit reports for up to 10 years in some cases. That can result in you being denied future credit, mortgages and other financial opportunities. It can even make things like auto insurance more expensive. That’s why it’s best to exhaust all other possible options before making this choice.
What to do after you get rid of payday loans
After you get out of payday loan debt, you want to make sure you never go to a payday lender again. Start cleaning up your credit and get a free credit report. Regularly checking your credit is the best way to make sure you clear up any mistakes. Plus it’s rewarding to see your credit score improve.
Getting out of payday loan debt can seem daunting, but it’s worth the effort and hard work. Taking control of your finances—and actually being able to plan for the future—is a reward worth striving for.
This article originally appeared on Credit.com.
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