Payday loans can be alluring if you urgently need money. Payday loans are unsecured loans of $500 or less that are due in two to four weeks, usually on the day you receive your paycheck. These loans provide quick access to cash and are available regardless of your credit score. Unfortunately, payday loans are also very costly and have interest rates that can reach as high as 400%, according to the Consumer Financial Protection Bureau.
You must pay off your payday loan debt immediately in order to prevent taking out more of these loans in the future. Although it’s difficult, the following actions are necessary for you to escape payday loan debt:
Let’s take a closer look at each of these procedures to gain a better understanding of the process of repaying payday loan debt. Jump ahead.
How payday loans work
Payday loans are short-term, small-dollar loans typically capped at $500. Theyre considered high-interest because of their fee structure.
According to the Consumer Financial Protection Bureau, a typical two-week 100% payday loan has fees of 15% and costs $20%E2%80%94. This means that the annual percentage rate is $391 percent (20%E2%80%94) In this particular context, financial experts believe that the maximum annual percentage rate (APR) that a loan can have without going over budget is $336.
According to Anne Leland Clark, executive director of Exodus Lending, a nonprofit organization with headquarters in St. Louis, payday loans can appear like a foolproof answer to an urgent financial crisis because they are comparatively simple to obtain. Paul, Minnesota, which assists households in escaping debt caused by predatory loans However, people’s financial circumstances get more unstable when they are unable to repay.
“When faced with a financial crisis or trauma, payday loans might offer instant relief, but they almost always cause further trauma,” claims Clark. “People experience increased stress and become stuck in a cycle where they are unable to catch up.” “.
The payday loan debt cycle
A debt cycle occurs when recurrent borrowing results in a debt that keeps growing and may require additional borrowing to keep it under control.
Four out of every five payday loans are reborrowed after the initial two-week term, according to CFPB research from 2014. The majority of borrowers wind up owing more in fees than the initial loan amount, according to CFPB research.
That was the case with Shannon. Despite only receiving a $140 loan at first, she ultimately paid $500 in fees and made little headway toward repaying her principal.
According to Clark, one of the reasons payday loans are so difficult to repay is their short repayment period. If you don’t have enough money when you borrow it, you probably won’t have it when the loan is due in full two weeks later along with the interest.
Depending on their state, borrowers may be eligible to renew the loan if they are unable to repay it. But since renewals come with an extra cost, it will be even more difficult to make up the difference when the loan is due again.
“People aren’t really paying down their loans, even when they feel like they’re making progress,” claims Yasmin Farahi, senior policy counsel and deputy director of state policy at the Durham, North Carolina-based Center for Responsible Lending. “Thats how the cycle continues. They are making some payment, but it is insufficient to release them from this “.
Payday loan borrowers shouldn’t feel guilty about being caught in a cycle of debt, according to Clark and Farahi. Even though consumer finance education can be beneficial, more regulatory actions are reportedly required to properly address the problem.
“It is imperative that consumers comprehend that this is essentially a policy issue,” states Farahi. “Policymakers must make sure that these loan sharks are eliminated; it is not the responsibility of the public to learn how to coexist peacefully with sharks.” “.
Breaking free of payday loan debt
Shannon eventually discovered Exodus, who provided her with a 12-month, zero-interest loan to refinance her payday debt.
Now that she is debt-free, she wants others to be aware of how simple it is to fall victim to payday lending. Shannon acknowledges that it is difficult, but says the important thing is to ask for assistance before the debt spirals out of control.
Consumer advocates strongly advise looking into the options below if you’re having trouble paying off payday loans.
Research organizations in your area that offer financial assistance
There should be groups in your state or city that offer financial support to residents who are in need. Look for nonprofits, charities and religious groups. While some organizations, like Exodus in Minnesota, focus exclusively on payday debt, others may provide general financial assistance to help cover necessities like rent or groceries. Make use of the savings on those costs to settle your payday loan.
Reach out to a nonprofit credit counseling agency
Credit counseling organizations focus on assisting clients with their financial needs, including debt relief Credit counselors can assist you with managing your finances, setting up a budget, and investigating your options for paying off debt, such as a debt management plan. In a debt management plan, you make payments to the credit counseling company, which settles your debts and might also charge you a fee.
Look for a reputable nonprofit credit counseling agency through the Financial Counseling Association of America or the National Foundation for Credit Counseling. According to the CFPB, a reputable organization should send you information about their services for free so you can decide if its the right fit.
Take out a small-dollar loan from a credit union or bank
More credit unions and banks are offering small-dollar loans. These loans may enable you to settle your payday loan debt and replace it with a more reasonable loan.
Your neighborhood credit union is a great place to start. Although you must join the credit union before submitting an application for a loan, most credit unions offer simple and inexpensive membership. Payday alternative loans, or PALs, are among the small loans that certain federal credit unions provide. These loans have a $200–$1,000 maximum loan amount and cap borrowing costs to make the loan affordable. Prior to applying, you must be a member of the credit union for one month. But some credit unions provide an additional PAL that has larger loan amounts and lets you apply right away.
Banks are also expanding their small-dollar lending, but to qualify, you must have an active account that is in good standing. It doesn’t hurt to call the bank, explain your situation, and ask if they’re willing to offer you a loan—even if your account isn’t in good standing.
Borrow money from a family member or friend
Don’t be scared to reach out to your network if an organization or financial institution is unable to assist you. Asking a friend or family member for money can be difficult. However, you can ease the situation by putting in writing the terms of the loan that you and the other party have agreed upon, including when and how you will repay the money as well as whether interest will be charged.
Many people experience financial difficulties at some point, so keep in mind that by getting back on your feet, you might eventually be able to assist someone else.
FAQ
What happens when people Cannot pay off a payday loan?
Fees are likely to be incurred. A bank fee may be assessed against you for each unsuccessful attempt. Successful attempts might empty your bank account and result in the bouncing of additional transactions, which would cost you money. Missed payments may result in late fees being assessed by certain payday lenders.
Can I close my bank account to stop payday loans?
The lender may still attempt to cash the check or take money out of the account even if you close the checking account to prevent them from taking what you owe. That could result in you owing your bank overdraft fees. The payday lender might send your loan to collections. Then there will be more fees and costs.
How do I stop paying my payday loan?
Give your bank the stop payment order at least three business days in advance of the next scheduled payment in order to prevent it. The order can be placed in writing, over the phone, or in person. You may need to submit a written stop payment order to your bank in order to halt further payments.
Will payday loans settle debt?
Yes. You have the option to select a payday loan settlement with the payday lenders for as little as 5% of the total amount and pay off your debt in 2-4 years. Creditors will update your account as “paid as settled” on your credit report once you pay the agreed-upon amount.
Read More :
https://www.nerdwallet.com/article/loans/personal-loans/how-to-get-out-of-a-payday-loan-nightmare
https://www.fool.com/the-ascent/personal-loans/get-out-of-payday-loans/