How to Stop Your Payday Loan Debt Cycle

Inside Subprime: Oct 8, 2018

By Jessica Easto

Twelve million Americans use payday loans each year, spending more than $7.4 billion annually. These controversial loans are often marketed as a quick credit solution, but they frequently trap people in a cycle of debt that can be extremely difficult to get out of.

Payday loans are short-term, low-dollar loans that don’t require a stellar credit score. Because they can be obtained quickly and easily, they are often used to pay for rent, car payments, and other regular, ordinary expenses when someone is running short on cash that month.

The problem is payday loans come with extremely high interest rates (typically 400 percent APR), and if a borrower cannot repay the loan on time, a lender may offer to “roll it over.” This gives the borrower more time to pay, but it usually increases the interest rate and charges fees, ultimately compounding the cost of the loan. This can happen over and over again, each time pushing the borrower farther into debt.

Unfortunately, defaulting on payday loans is common. According to a report by the Center for Responsible Lending, 39 percent of the payday borrowers studied defaulted within one year of their first loan and 46 percent defaulted within two years.

If you’re one of the thousands of people trapped each year in a cycle of payday loan debt, there are a few things you can do to get out of it. First, consider speaking with an accredited credit counselor. He or she can educate you about debt management and help you consolidate your debt, making payments easier. You can also ask your lender for an extended payment plan that doesn’t raise your interest rates or charge additional fees. Not all lenders offer this, but you have to ask to find out.

Of course, sometimes you need to borrow money—but you don’t need to resort to another payday loan to do it. If your credit is good, you may be able to secure a personal loan through traditional lenders such as banks or credit unions. If your credit isn’t so great and traditional lending isn’t an option, you can explore personal installment loans from trustworthy modern lenders.

Even after you find a new payment plan that works for you, you can improve your chances of staying out of default and getting out of debt by learning more about your finances and budgeting. Taking control of your money can help make loan repayment easier and help you avoid the need for payday loans in the future.

For information on predatory payday loans in your area, check out all of our Subprime Reports, including:

California | Illinois | Florida | Texas

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