How to Stop Relying on Payday Loans

Payday loans are like a black hole. They suck in your money and trap you in a vicious cycle of borrowing. If you're a payday loan customer, it can feel overwhelming. But you can break the cycle and stop relying on payday loans.

How payday loans work

Let's say you need money fast and are thinking of taking out a personal loan.

Your electricity has been shut off for non-payment, or your car has blown a gasket. Your savings account is empty, and you think your credit score is too low to qualify for a bank loan. You won't get paid for another 10 days and decide to take out a payday loan to see you through.

If you live in a state that allows payday lenders, you might visit a physical location or go online. Payday lenders make it easy. All you need is your identification, a pay stub (or other proof of employment), and a postdated check. You tell the lender how much money you want, write a check that covers the loan and fees, and postdate the check by two weeks.

If -- like most borrowers -- you are unable to pay the loan off by the time it is due, you may have to take out another payday loan to cover the first one. Each time you take out a new loan, the interest charges and fees pile up, making it harder to get out of debt. Worse yet, a personal loan study by The Ascent found that you could end up paying 400% or more in interest and fees. To put that in context, the average credit card interest rate is about 15%.

Say you borrow $500 for 14 days and the APR hits 400%. On day 14, when the loan is due to be paid off, you would owe the original $500 as well as $77 in interest. Very often, people can't repay the entire $577 and are forced to take out another payday loan. You'd then start to pay interest on the interest.

If you currently owe money on a payday loan, this situation will be all too familiar. Hard as it may seem, the sooner you can break the cycle, the better. Here are four steps that could help:

1. Speak to a nonprofit credit counseling organization

Credit counselors will not loan you money, but they will help you take control of your personal finances by crafting a plan to pay debt, cut unnecessary expenses, and make the most of your money. Look for a certified counselor, check their qualifications, and make sure you understand any costs involved. Many reputable nonprofit credit counseling organizations offer free help.

Speaking of nonprofits: Here is The Ascent's list of best credit cards for nonprofits.

2. Consider payday loan alternatives

There are a number of payday loan alternatives you may be able to try.

A personal loan from a reputable lender could help you pay the payday loan off in full. Do not assume that you won't be able to get a short-term loan from a bank or credit union just because you have fair or bad credit.

Look into a personal loan with collateral. This is a type of secured loan that requires you to put up something of value that the lender can take if you fail to pay the loan, like your car title -- though be aware that if you fall behind with payments, you risk losing your transportation.

Using your car as collateral through a reputable financial institution should not be confused with the "title loans" available through predatory lenders. Title loans are no better than payday loans and will cost you just as much.

3. Check with churches and community organizations

There are a number of charitable organizations, including churches and community groups that might be able to help you get back on your feet. Your state may also have hardship programs available. Apply for as much assistance as you can get, and put the extra money toward that payday loan.

For example, you might get groceries from a food pantry or accept assistance paying your electric bill. You can then use your grocery and electricity money to pay off the high-interest loan.

4. Consider a cash advance

This may be the only time in your life when anyone suggests that you take out a credit card cash advance. If you are truly in a pinch, it's preferable to pay 30% APR on a cash advance than 400% APR on a payday loan. Cash advances usually come with fees and start to accrue interest immediately, so you'll still need to pay it down as quickly as possible. The last thing you want is to get stuck in a high-interest cycle of credit card debt.

No matter how you opt to pay the payday lender off, you can break free. And when you do, you'll need to come up with a plan so it doesn't happen again. That may mean taking on a side hustle that allows you to stay on top of your bills. It may involve ruthlessly cutting all but the necessary expenses from your monthly budget until you have an emergency fund that will see you through a crisis. Perhaps you could share expenses by taking on a roommate, utilize public transportation so you can sell your car, or find a less expensive place to live.

Whichever route you choose, you can be sure that it beats taking out another payday loan. Like casinos, payday lenders always win -- but only if you play.