As a senior attorney and consumer finance expert, I’ve met many people whose life has been ruined by payday loans. Their stories are incredibly identical. They turn to payday lenders for an immediate cash need, only to find themselves trapped for months, if not years, paying exorbitant costs for little loans that they will never be able to repay. Payday borrowers are pressured to pay loan fees before paying fundamental living needs like rent, mortgage, energy, and even supplies, due to the fear of rejected checks or the bogus threat of prosecution.
I even observed a close friend’s life get devastated by an obsession with payday loans fast cash. Walking into a payday loan store and walking away with $500 seems too fantastic to be true, and it also appeared to be far too simple to repay merely $50 every week.
The result? He still doesn’t own a home, lives in a rented flat with others, and has spent more money on payday loans than he would have spent on a down payment on a property.
When I looked over my friend’s dire financial situation, I observed four critical facts regarding using payday loans as a short-term financial solution.
- Payday loans target high-risk borrows in vulnerable financial situations
- People use payday loans to address financial challenges that these loans can’t solve
- Borrowers choose payday loans because they lack other viable options
- The financial consequences can be devastating
This situation inspired me to learn everything I could about payday loans and oppose them as a payday loan crusader. I’m sharing that knowledge with you so that if you’re in a similar situation with payday loans, you can understand why it’s so problematic and what you can do to solve it.
Who uses payday loans?
Payday loans are used by 12 million people in the United States each year. A borrower pulls out eight $375 loans in a typical year and pays $520 in interest.
As per the Pew Research Center, 6 percent of adult consumers in the United States took payday loans during the last five years, with three-quarters of consumers choosing storefront lenders and nearly one-quarter utilizing online lenders.
State regulatory data shows:
- The average borrower pulls out eight $375 payday loans every year
- The borrower spends approximately $520 on interest and a loan size of $375
- Every year, $9 billion is spent on payday loan fees
Payday lending provides Americans with a cash advance on their paychecks. The majority of borrowers are white women between 25 and 44. Those without a four-year college degree, house renters, African Americans, those earning less than $40,000 yearly, and those separated or divorced have an increased likelihood of utilizing a payday loan after controlling for other factors. While lower income is linked to a higher risk of using a payday loan, other indicators can predict payday borrowing more accurately than income.
Why do people use payday loans if they’re so bad?
People take out direct payday loans for a variety of reasons. It’s not simply about saving up for a one-time purchase like a luxury vacation. If you find yourself in a financial crisis, payday loans can be very appealing. First-time consumers borrow a payday loan:
- 69% use it to cover recurring expenses, such as utilities, credit card bills, rent or mortgage payments, or food expenses
- 16% cover an unexpected expense, such as a car repair or emergency medical expense
There are a few core reasons why people take out payday loans:
Unemployment is a horrible experience that no one wants to go through. It is financially as well as emotionally draining. You may find yourself scraping money together at times, anxious to make ends meet.
Payday loans have a terrible reputation in the media; therefore, many individuals strive to avoid them. Instead, they try to borrow money from banks and other financial institutions when they need a loan.
However, if you don’t have a strong credit score, your loan application will almost certainly be denied. On the other hand, payday lenders are willing to lend to persons with bad credit as long as they can afford the loan.
There is little doubt that many people who take out payday loans do so to pay off another obligation. The loan may be utilized to repay previous debts. It could also be a debt from somewhere else, such as a credit card. Taking out a payday loan may make sense if that’s the case, especially if the loan’s interest rate is lower than the amount owed on the other obligation.
However, given the interest rates on most payday loans, the total cost rarely comes out in the borrower’s favor. For debt consolidation to be effective, the interest rate on the new loan must be significantly lower than the rates on the original debts.
If you don’t have health insurance, a medical emergency will always be a significant expense. It might be anywhere from two thousand to several hundred thousand dollars. It may depend on what kind of treatment you need. Interest and penalties can accrue if you don’t pay your bill right away, so taking a quick loan might work. For this reason, many consumers take out payday loans or short-term loans to pay for their medical emergencies.
Direct payday lenders always make a lot of money during Christmas. During this time, parents grow desperate as they try to buy everything their kids want. People take out payday loans as they appear to be the most convenient option. You get the money you need for the holidays, and then in the new year, ideally, after you’ve made some money, you can pay back what you owe.
Paying off hefty bills is one of the most typical reasons people take for a payday loan. Power, gas, phone, cable, gym subscription, and many expenses can be met using payday loan money.
Is it worse to get a payday loan or fall behind on your home payments? The majority of individuals would say that the latter is the worst alternative. Mainly because the mortgage company will assume you can’t afford the house at that point. They may then take legal action against you, especially if you keep making late payments.
There are two things to examine in this situation. So, consumers borrow payday loans and make monthly mortgage payments.
Why do people choose payday loans over other alternatives?
Payday loans are sometimes short-term financial solutions for unexpected costs such as auto repairs or medical emergencies. However, the average borrower takes out eight 18-day loans per year. That means they have a payday loan topay back for five months each year. Furthermore, it is also known that the loans are being used to cover recurring, continuing living expenses.
People select payday loans over other options for a variety of reasons:
Applying for a payday loan is pretty quick and straightforward from start to end. Answer a few queries, upload a few documents, and you’ll get a decision almost immediately after submitting your application.
Payday loans are well-known for supplying funds to persons with poor credit. While traditional banks and lenders often have stricter loan restrictions, payday loans are designed for ordinary folks who really need a push when times get bad.
After being accepted, individuals who visit a store location will get cash right away. There’s no need to wait; leave immediately with the money. If you apply online, you could get cash in your bank account the next business day. The money can be used in any location and for any reason, and it is up to the consumer to decide how to spend it.
People never know when a sudden financial issue will arise, and they need to gather a lot of money to get out of that situation. So, when consumers find themselves in a financial bind, they consider a payday loan as a viable option.
What happens to people’s finances after borrowing payday loans?
Most of the time, consumers take out payday loans because they cannot obtain immediate cash elsewhere. Unfortunately, if the consumer cannot repay the debt, their financial circumstances may deteriorate further. The lender may threaten to launch a lawsuit and garnish the salary, depending on how long it has been since a borrower obtained the loan.
Failure to repay a payday loan has several negative ramifications, including:
Most lenders will seek to withdraw funds from the bank account regularly, as permitted by the loan agreement provisions. If your bank rejects the transactions owing to a lack of funds, the lender may proceed with lesser withdrawals.
Even if the lender receives a portion of the unpaid debt through this technique, you may still be in financial trouble if additional banking transactions are denied. Furthermore, bank fees can quickly add up, costing you hundreds of dollars in a short period.
If you can’t pay off your payday loan in the set period, depending on your location and your lender, you can face extremely high interest charges. Nonsufficient funds (NSF) fees are incurred when you do not have sufficient funds to complete a transaction.
Your credit score would be affected if you can’t repay your payday loan on time. If you default on a loan and turn the debt to a collection agency, your credit score will suffer even more.
For around 60 days, your lender will try to collect payment from you. If you don’t pay them within this time range, they’ll likely hire a third-party debt collector. You should expect the debt collection firm to call and write to you regularly until the money is received. You’ll see that they’re significantly more aggressive in their collection efforts than your lender.
Even if you only defaulted on a tiny sum of money, a collection agency may pursue you in court. This could result in liens on your property and perhaps wage garnishment based on your location.
The lender bears the burden of evidence if you go to court to prove you owe the amount. Ask for documents or the loan agreement you signed when you took out the loan. If the debt collector cannot supply this information, the judge will undoubtedly dismiss the lawsuit. However, if the lender establishes that you owe and obtains a court judgment, you may be required to pay or have your earnings garnished.
Because a payday loan default can linger on your credit report for up to seven years, you may have difficulty obtaining other credit lines such as new credit cards or loans in the future.
How to get out of payday loans
As a payday loan crusader, I’ve tried my best to educate my clients about the horrors of payday loans. To every consumer who is thinking of borrowing payday loans, my first and genuine suggestion would be…NO, you shouldn’t borrow from a payday loan, ever!
But like many of my clients, if you have already have a payday loan burden on you and are now facing financial hardship, I have a few practical tips for you. These tips might help you manage your finances and get out of the payday loan debt trap together.
It’s hard to avoid these types of loans, but the steps you’ll need to take to get out of payday loan debt include:
Pay off your payday loans in full
Nothing is better than paying off your debt obligations in full. So, it should also be your first choice in the case of payday loan debt. But you need to check out a few things before that.
- You must stop ACH authorization (automatic withdrawals from your bank) on payday loans.
- If your payday loan company is legal (they have the license to do business in your state), you must pay off the principal amount plus interest. If you can’t pay that, they can take legal action against you.
- If your payday loan company is illegal (they do not have the license to do business in your state), you should only pay the principal amount and not bother to pay the interest. Even if you do so, they can’t take legal action against you.
Request a repayment plan
Payday loans have such high interest and fees that making payments while staying on a budget can be incredibly difficult. The good thing is that you may be able to reduce your payments.
Some states require payday lenders to offer an extended payment arrangement that allows you to pay back payday loans over a more extended period without paying extra penalties or fees. However, laws differ by state, and your lender may be able to charge you a fee for agreeing to a repayment plan.
Follow the National Conference of State Legislatures for information on your state’s laws.
Even if your state doesn’t require lenders to offer a payment plan, they may be prepared to work with you if they worry they won’t be paid otherwise. So, it’s not a bad idea to inform your lender that you cannot make your payments as planned and that you need to figure something out. Requesting a payment plan is preferable to getting more payday loans since your current loans consume too much of your income.
Prioritize loans with high-interest rates first
To begin, make a list of all your loans. Take the time to study each loan agreement and make sure you understand everything. Always aim to pay off your loans with the highest interest rates first. The more you owe, the more you pay because of how interest payments work.
Non-payday loans, such as credit card personal loans, should generally be held because they have a much lower interest rate.
Finding out what APRs you’re paying on each loan may take some investigating, but it’ll be well worth it once you know which ones have the highest interest rates to prioritize them.
Boost your earnings
Increasing your income is an excellent strategy to pay off payday loans. When your salary rises, you can put all the extra money in your paychecks toward paying off your payday loans so that you don’t have to keep rolling them over. Extra cash is easier to come by than you might imagine.
Cut down on your expenses
When you cut back on your expenses, all the extra cash you’d otherwise spend can pay off your payday loans. By removing non-essential spending from a typical monthly budget, you can free up a significant amount of money for payday loans.
Don’t take on any more debt
You must first cease taking on new debt to get out of your current debt. Stop rolling over your payday loans and commit to not taking them out anymore. This is one of the most straightforward ways to discover how to get out of payday loan debt, but it’s also one of the most challenging.
You’ll need to be quite disciplined when it comes to your cash. Adopting the 50/30/20 rule is one approach to do this. Of course, you are not required to follow the rule’s exact percentages. If you’re in a lot of debt, it’s good to limit your discretionary spending and strive to pay off your debts as soon as possible.
Pay extra on your payday loan debt
Extra payments are necessary if you truly want to pay off your debt as soon as possible. When you start making additional payments, it will cost you less in the long run, and it will take you less time to get out of debt.
Since all additional funds go toward the principal, paying extra on your debt will reduce the debt faster. And because interest is charged on a lesser amount, the more you lower your balance, the less interest you’ll pay.
You can make extra payments if you stick to a strict budget and eliminate costs. You might also hunt for more funds to supplement your income.
Try a payday loan consolidation program
Consolidation services combine all existing payday loans into a single monthly payment schedule. This may be the most successful method for paying off the payday loan debt, but be wary of scammers.
Consolidating payday loans can be done in two ways.
The first is a debt consolidation loan in the traditional sense. In this situation, a lender will provide you with a new loan with a lower interest rate, which you can use to pay off your higher-interest short-term loans. If you choose this option, the industry experts and the federal government will suggest speaking with a credit counselor to make sure you understand what you’re getting yourself into.
On the other hand, payday loan debt relief services, often known as debt settlement, or debt consolidation, are unique. In this case, a third-party company will take over the repayment to the payday lenders and charge you a single monthly payment.
They will assist you in preventing lenders from automatically drawing from your bank account (thereby avoiding overdraft penalties) and will negotiate directly with creditors to develop a proposal that works for you.
Consider filing bankruptcy
Sometimes it might get challenging to agree upon a repayment plan that isn’t affordable to you. If you find yourself in a financial crisis and can’t take out more loans to pay off the existing ones, you might have no choice but to settle your debt or declare bankruptcy.
The process for discharge of debts differs in Chapter 7 or Chapter 13 bankruptcy. Chapter 7 compels you to surrender some assets to the bankruptcy estate for creditors to be partially reimbursed. Before the remaining debt is discharged under Chapter 13, you must make payments on a payment plan for three to five years.
Bankruptcy damages your credit score, but it may be the only way out if you have a lot of payday loans and other debt that you can’t pay off. You can begin working on restoring your credit when your debt has been discharged in bankruptcy and is no longer recoverable.
Contact State Regulators
While state regulators may not be able to assist you to stop paying your payday loans, they may be a smart next step if you haven’t been able to reach an agreement with the lender in other ways. If payday lenders refuse to negotiate with you on a more extended repayment schedule for your debt, contacting the state agency that governs lenders may be beneficial.
You can check the state statutes maintained by the National Conference of State Legislatures to see if the payday lender has breached any laws in its interactions with you. State regulators might be able to assist licensed payday loan lenders in negotiating a payment plan. They may also take legal action against unauthorized payday loan lenders.
File a complaint
If the payday lending company refuses to negotiate with you on a repayment plan, you can file a formal complaint with the Better Business Bureau. Complaints can be lodged with state authorities and the Consumer Financial Protection Bureau on a national level.
