Question: I am buried in payday loans. They are eating my paycheck, and I’m falling behind on everything else. What steps should I take to get my paycheck back?
— Peter in Florida
Steve Rhode answers…
The issue surrounding payday loans is less mathematical and more emotional. People routinely make incorrect decisions about how to deal with their debt based on emotion, rather than reality. Payday loans are often a good example of this.
The payday loan industry has put up a strong defense to a complicated problem. Can someone take out a payday loan for a short period of time to meet an unusual expense and repay it with interest and a fee? Yes, they can. But a payday loan is a financial tool. Like any other tool, that can be used safely or dangerously.
The debt problem created by payday loans surrounds the granting of multiple payday loans or rolling old loans into new ones. It does not break a cycle of debt but instead makes it worse. The federal government and some states have suggested practices that would prevent this sort of business practice. For example, a 60-day cooling-off period between loans or a national database of payday loans so lender could know who has an open loan at the moment and not grant another.
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In general, the folks I’ve seen with multiple payday loans (who are losing their paycheck and falling behind on everything else) need to take a step back and look at this situation with a wider lens. While you’re currently reacting to the payday loan issue; and the paycheck hassle it is creating for you — it’s just a sign. You probably have bigger financial problems brewing.
For example, I suspect you have no emergency fund or savings account to use if something else needed your financial attention. One more unexpected financial surprise would be unsustainable for you. You’re currently struggling with a past payday loan, and the payday lenders are typically the lenders of last resort, along with pawn shops.
And you’ve already said you have multiple payday loans, so the odds are you are well buried already.
One option if you are struggling with one or two loans is to see if the payday company is a member of the Community Financial Services Association of America and then try to see if the company will offer you an EPP (Extended Payment Plan). Some states might limit or prohibit this.
Quite frankly, often the least expensive and fastest way to get back onto a solid financial footing is to consider a fresh start and eliminate all of the debt through what is often the least expensive legal option: a consumer bankruptcy.
The odds are you will be able to file a Chapter 7 bankruptcy, eliminate your debt in about 90 days, and use what you learned from the debt and do better moving forward. Consider the experience with payday loans a teachable moment on maybe what not to do.
So many people avoid bankruptcy for all the wrong reasons. They have misconceptions and hear myths about bankruptcy. So many are just wrong. You should read my article on the topic.
While your focus has been on the payday loans, the “everything else” you might be falling behind on could be so much worse. You should always make every effort to stay on top of the housing, utilities, and transportation obligations. And let’s not forget about the need to be able to save money and build an emergency fund so that when financial surprises happen you can turn to your savings account for help and not another expensive and painful payday loan.
