Published in: Personal Loans | Aug. 12, 2019
By: Christy Bieber
How can you get out of payday loan debt? Take these steps to deal with these high-interest financial obligations.
Payday loans can be tempting when you need cash right away. These loans are available regardless of your credit score and offer immediate access to cash you borrow for a short time. Unfortunately, payday loans are also extremely expensive with interest rates that can be close to 400% according to the Consumer Financial Protection Bureau.
Once you borrow with a payday loan, the high fees and short repayment timeline associated with your loan can sometimes make it difficult to stop borrowing. In fact, many people end up taking one payday loan after another or even taking multiple payday loans at the same time. This can quickly lead to financial disaster when a big portion of your paycheck is promised to lenders before you even receive it.
If you’re in payday loan debt, you need to get out of it now -- and avoid these types of loans in the future. It’s hard, but the steps you’ll need to take to get out of payday loan debt include:
In some cases, you may also have to consider alternatives such as debt settlement and bankruptcy. While these approaches are considered last resorts, they can help if you’re truly in over your head.
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To better understand the process of repaying payday loan debt, look at each of these steps in more detail.
You cannot borrow your way out of debt -- especially with high-interest loans such as payday loans. You have to break the cycle by not taking out any more loans. This can be really difficult if your paycheck isn’t stretching far enough due to the payments you’re already obligated to make -- but it is necessary.
The best way to make sure you don’t borrow any more is to make a detailed budget that you live on. Figure out what your income is each month and add up all of your essential expenses and discretionary spending. You’ll need to make sure your spending and expenses do not exceed your income. If they do, you’re going to have to keep borrowing forever and will never be able to get out of payday loan debt.
If your income doesn’t cover expenses, start looking for places to cut spending. This may mean clipping coupons to reduce your food budget or getting a roommate to make rent more affordable. If you have a drastic shortfall in the amount of cash available to cover expenses, you may need to really cut spending to the bone -- but it’s necessary to do this at least on the short-term so you can climb out of debt.
With interest and fees so high on payday loans, it can be almost impossible to make payments and still live on a budget. The good news is, you may have options to cut your payments.
Some states mandate payday lenders allow an extended repayment plan that gives you more time to pay back payday loans without incurring additional penalties or fees. Laws do vary by state, though, and your lender may be able to charge you a fee for entering into a repayment plan. You can find out your state’s laws by checking the National Conference of State Legislatures.
Even if your state doesn’t require lenders to provide a payment plan, lenders may be willing to work with you if they fear they’ll otherwise get paid nothing. So it doesn’t hurt to let your lender know you cannot continue to pay as planned and need to work something out.
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Asking for a payment plan is far better than simply taking out more payday loans because too much of your budget is taken up by payments on the loans you already have.
There are other kinds of debts out there that are much more affordable than payday loans. Payday alternative loans offered by credit unions are one example of a loan you could potentially get quickly and use to pay off existing payday loan debt. You could also apply for a personal loan with a bank, online lender, or credit union, or could ask your friends and family for a loan.
If you’re able to get a personal loan or a loan from a loved one, you can significantly reduce the interest rate and borrowing costs you pay compared with payday loans. More of your money will go towards paying down your principal balance so you’ll actually be able to make a dent in getting your debt paid down.
And personal loans come with fixed repayment schedules that usually give you several years to pay off your loan. This extended repayment timeline can make your monthly payments more affordable so you don’t end up having to borrow more money when your paycheck doesn’t stretch far enough to pay everything you owe plus cover expenses.
If you really want to pay off your debt ASAP, making extra payments is essential. When you make extra payments, it will cost you less in total to pay off your debt, as well as reduce the time it takes until you are debt free.
Paying extra on your loan will reduce the balance down more quickly because all of the extra money goes towards principal. And the more you reduce your balance, the less interest you’ll pay since interest is being charged on a lower amount.
You can make extra payments by living on a careful budget that cuts expenses. You can also look for extra cash to boost your payment. Doing overtime, working a side gig, or selling stuff you don’t need can all give you extra money to pay on your payday loans.
Sometimes you may not be able to come to an agreement on a repayment plan that makes payday loans affordable for you and you will not be able to get a new loan that makes paying payday loans affordable.
If you find yourself unable to make payments and still cover your essential monthly costs, you may have no choice but to try to settle your debt or to declare bankruptcy.
Debt settlement involves reaching an agreement with creditors to pay off less than the total owed and have the rest of your debt forgiven. Debt settlement attorneys or debt settlement companies can negotiate this type of agreement with payday loan lenders -- but you will have to pay fees.
You can also try to negotiate this type of agreement yourself by letting payday loan lenders know you have no ability to pay as promised. If you can offer a lump sum payment of part of your debt in exchange for having the rest of your debt balance forgiven, this approach often works best. Just be aware lenders usually won’t agree to a settlement unless you’ve missed payments -- and that debt settlement hurts your credit score. You’ll also want to get your agreement in writing before you pay anything.
If debt settlement won’t work and payments are unaffordable, bankruptcy may be your only answer. Bankruptcy will allow you to discharge eligible debts, including payday loan debts. The process by which debts are discharged varies depending whether you file Chapter 7 or Chapter 13. Chapter 7 requires you to give up some assets to the bankruptcy estate so creditors can be partially paid, while Chapter 13 requires you to make payments on a payment plan over three to five years before the remaining balance of debt is forgiven.
Bankruptcy hurts your credit score, but it can allow you to get out of a deep hole if you have lots of payday loans and other debt you can’t afford to pay. Once you’ve had your debt discharged in bankruptcy and it’s not collectible any more, you can start working on rebuilding your credit. This can be done over time by living within your means and getting a secured credit card you pay on time to develop a positive payment history.
Ultimately, there’s no one right approach to getting payday loan debt repaid. Entering into a repayment plan makes sense if your state requires lenders to allow them or if your lenders are willing to work with you. Taking out a new loan at a lower rate to pay off payday loan debt can work if you’re able to qualify or have a loved one who will let you borrow. Paying extra on your loans is possible if you can work more or sell extra items to come up with more cash. But if none of these options work for you, debt settlement or bankruptcy may be the only way to finally break free of payday loan debt.
Consider each possible option carefully, weigh the pros and cons, determine which solutions are viable, and then take action. Start working on your approach today because you definitely want to get your payday loans paid off ASAP before they cost you even more money.
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