Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt Trap

Date October 23, 2018

You’ve most likely seen these signs “payday loans,” “fast money,” “24h loans,” “check cashing,” etc. The lenders try to advertise their service in any possible way (colorful ads online, pop-ups, catchy signs) just to get you on the hook. No one of them will tell you how dangerous it is to get payday loans. Unfortunately, sometimes life forces you to make poor decisions and probably that is the reason why one of ten Americans has tried payday loans at least once in their life.

Yet, popularity doesn’t necessarily imply good quality, or that a service is beneficial in any way. Same goes for payday loans. Even though the industry is around $9 billion in the U.S., taking out this type of loans is more likely to destroy your personal finances in the long run rather than actually help in the short-term perspective. And the worst thing about payday loans is that lots of Americans are forced to roll over (renew) again and again due to excessively high interest rates and fees. What to do in case if you have already stuck in the vicious circle of debts? Here are some recommendations on how to get out of constant payday loans.

Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt Trapdcwcreations /

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How to get out of the payday loan nightmare?

First of all, you need to fully understand how the payday loan works to be able to make it a thing of your past. Payday loans were designed to help people get money in case of some unexpected financial emergency, yet many people use it for their regular daily expenses and even special occasions like buying a present for their loved ones. Few realize how they are getting drowned in the debt cycle and forced to roll over the tenth time already. This type of loans is promoted as the best way for a person to live till their next paycheck.

Payday loans are small, short-term (usually two weeks), unsecured personal loans, which means they don’t require collateral. Basically there are three main issues about these loans: time, interest, and fees. You might not realize it yet, but two weeks is an extremely short period of time to repay the debt fully with high interest. And if you failed to do so, the amount of money you owe grows horrendously fast because of both high interest rates and fees.

Payday loans, also known as cash advance loans, are legally allowed only in 36 states. The other states basically have very strict regulations making it unprofitable for lenders to offer the service.

Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt Trap

Why should you avoid payday loans as a source of funds?

Behind what seems to be a good and beneficial design hides a true scam. The model, which is built around a small amount of time, high interest rates, and exceptionally scary penalties, is supposed to make you renew the loan. But what attracts people to this service: fast money. Typically, there’s no credit check, and the loan can be approved within the maximum of several hours.

If you don’t know how to get a payday loan, you just write a check for the amount you wish to borrow plus the interest and possibly a fee and give it to the lender. This check is dated for your payday, which is typically in two weeks. After the approval, you receive your borrowed money. So what exactly is wrong with payday loans?

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1. Extremely expensive

The most expensive credit card has an interest rate between 28% to 36%, whereas the annual percentage rate (APR) in case of payday loans can go up to 800%! Yes, it is not a misprint. For instance, if you borrow $100 for 10 days and that will cost you $15, that’s basically an APR of 400%.

Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt Trapastephan /

2. Debt cycle

The most dangerous thing about payday loans is a rollover. According to the Center for Responsible Lending, more than 75% of all payday loans are taken to repay the old ones. Another horrifying fact is that an average payday loan borrower stays in debt for more than half a year despite the fact the loan has to be within two weeks!

3. Fast application

You might consider this is actually an advantage, but the fact that you can literally get money loans during your lunchtime means you don’t have enough time to think about this decision and weigh all the pros and cons.

4. Debt collection

You might hook up with the wrong kind of lenders, who can even cross the line if you don’t pay in time. Such lenders simply don’t care about your rights and will do anything to get their money back. Payday lenders are known for their absolutely horrifying debt collection practice. There are, however, good lenders, but you never know for sure who is a good one and who is bad until the time shows.

Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt TrapTodd A. Merport /

Getting out of payday loans

Climbing out of payday loans might seem like Mission Impossible with Tom Cruise, but luckily, there are some certain ways of successfully leaving the horrible debt behind. Some people are wondering if they are going to jail for not paying off the loan. And according to the law of the U.S., you’re not – debtors cannot be imprisoned for debt. So if your lender threatens you with jail, be sure that’s not going to happen. Step by step you can get out of the payday loan trap.

1. Don’t panic!

This step might seem obvious to some people or even useless, but it really is mandatory. Just think about it for a second. When you’re panicking, you can’t see things clearly and especially come up with the ideas of how to get out of your payday loan debt.

2. Stop borrowing

Yes, simple as that. Just stop taking money from your lender to pay off the previous debt. There are some other, much better ways of solving this problem. And you can follow them in the next steps. At the end of the day, nobody will take your home or car away from you for not repaying the payday loan since it is an unsecured type of loan.

Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt /

3. Prioritize your debts

Paying off your payday loan is never a number one priority, isn’t it? You need to pay your household bills, mortgage or rent, food and living costs. Use only spare money to pay off the loan. And if your lender has your card details and has set up a continuous payment authority (CPA), simply call the bank and cancel the payday loan payment. You can also email your bank with the same request.

4. Refinance your debt

You should search for other, more stable and less risky payday loan alternatives, including credit unions. These financial institutions are smaller than typical banks and are focusing more on the community. They are might be willing to help you by covering your payday loan debt. Which basically means you will owe them instead of your lender. But the good thing about it is that the better terms may eventually get you out of any debts.

5. Look for debt counseling

There are credit counseling programs that can help you manage your debts and find the way out for you. What is credit counseling? It is basically a guide that is designed specially for you. Payday loan debt assistance analyzes your current financial situation, provides you with some helpful tips and creates a certain plan to deal with the debts. Look for popular, non-profit organizations, as they might even offer you a much more advantageous loan to refinance or even consolidate your payday loan debt. Beware of scams, though. The financial field has lots of these bugs.

Payday Loans: 4 Major Reasons To Avoid And 6 Steps To Get Out Of The Debt TrapJeanette Dietl /

6. Other sources of money

You can borrow from your friends and family for a loan, or even your employer for an advance on your next paycheck. This would be a perfect way for you to deal with the payday loan debt circle once and for all. Be sure, however, that you keep in mind the third step – prioritizing your debts. You need to be able to cover other costs and not just pay off the loan.

Getting out of the vicious cycle is the first step to start revitalizing your personal finances. Imagine a debt-free life with tons of opportunities and absolutely no “I owe some much money” stress. Yes, it is surely hard but possible! It is strongly recommended to avoid payday loans like the plague for this exact reason. They ruin your finances and as a consequence – your life.

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