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How to get out of a payday loan cycle of debt

Credit unions and faith-based organizations may be able to help.

If you had to borrow a payday loan and couldn’t repay by the deadline, you might have chosen to take out another “just to get by.” This probably led to an additional loan with more fees, likely followed by another and another, and soon the debt started to pile up.

If this situation sounds like yours, there’s still hope: You can get out of a payday loan cycle and avoid the huge costs of debt. All you need is the right strategy and proper planning.

Handling your debt

The most important thing you can do to get out of a payday loan cycle is to consolidate your debt. Because payday loans carry extremely high interest rates — usually in the triple digits — you’ll want to stop borrowing and merge all your loans into one larger one that has a lower, more manageable APR.

If you have damaged credit and you’re looking to consolidate your debt, your best option is to seek out a loan from a credit union or ask a friend or family member for help.

Your options to consolidate debt include: balance transfer credit cards, personal loans from a credit union, faith-based organizations and asking friends or family members for assistance.

1. Personal loans from a credit union

A credit union is owned by its members. Because of this, its terms are usually flexible and the loans it offers more accessible to people with bad credit and a history of debt. A credit union may look at more than just your credit score when deciding if you qualify for a loan.

The process to apply is simple. After you’ve had your account for a certain period (six months is average), you can apply for a loan from a credit union to consolidate your debt.

2. Faith-based organizations and military relief

Several faith-based organizations are popping up around the US to help those struggling to get out of the payday lending debt cycle. In short, these organizations will pay back your debt in full in exchange for you paying them the loan balance over a set period of time — often without interest or fees.

Military service members and veterans have similar options through veteran organizations.

3. Balance transfer credit cards

Balance transfer credit cards let you move your debt and pay little to no interest on it for a period of time. For example, a balance transfer credit card may offer a 0% APR for 15 months. That means you get a 15-month break from interest payments while you pay off what you owe.

To start with this option, find a balance transfer credit card that lets you transfer your payday loan debt. When comparing card providers, you can give more consideration to those that offer longer zero-interest periods so that you have the most time to pay off your debt.

You’ll typically need good credit to get the best balance transfer credit cards. However, you may be able to qualify for some balance transfer credit cards with fair or bad credit. To learn more, check out our guide to balance transfer credit cards.

4. Ask friends or family for help

After explaining your situation, one of your friends or family members may be willing to loan you the money you need without having to take out more loans. This type of “personal” loan often has the advantage of no interest attached.

If the person you talk to is unable to lend you the money directly, you may want to ask them about cosigning a loan with you. This option can be risky for the cosigner, so some may not want to put their credit on the line. But if you can prove you’ll be able to make the monthly payments, a cosigned loan will generally have better interest rates.

Can a payday lender garnish my wages?

Yes, if you don’t repay your payday loan, a lender or debt collector can usually sue you to collect. If they do so and win, or if you don’t dispute the lawsuit, the court will create an order of judgment against you. This will state the amount of money you owe, which means the lender or collector can then get a garnishment order against you. Wage garnishment means your employer is legally obligated to hold back a portion of your wages for your debts.

Prepare a plan to get out of debt

While consolidating your debt can be a great way of lowering your interest rates and thus the total cost of your debt, it’s not effective on its own.

Debt doesn’t come from nowhere. When you take a deeper look at your finances, you’ll likely find structural issues that led to your need for a payday loan. Credit counseling and budgeting are great ways to develop financial literacy and understand how debt works. Once you know how to tackle your spending habits and lower the costs of your day-to-day life, you’ll improve your credit and reduce your chances of being caught in a cycle of payday loan debt again.

You can find a reputable adviser through the National Foundation for Credit Counseling.

Before settling on a counselor, it can be a good idea to:

  • Contact and interview multiple counselors
  • Only consider counselors who don’t charge for their services
  • Understand the terms of working with your counselor

4 tips to get back on solid financial ground

Here are some other ways you can chip away at your debt without having to rely on loans and credit cards:

1. Create savings by cutting expenses

When your finances are stretched thin, any extra money helps. Examine your monthly spending and think about what you could eliminate. Some options are going without cable TV for a few months or cutting out daily extra expenses like coffee or snacks.

2. Find odd jobs

You might be surprised how easy it is to make extra cash. The Internet offers a wealth of gigs that you may be able to quickly qualify for and complete.

3. Sell things you don’t need

Most of us have things laying around the house that we no longer need. If you’re willing to part with them, websites like Craigslist or eBay are great places to sell from the comfort of your home, and the money you earn could help you pay off your loan quicker.

4. Set a budget

Setting a weekly budget can give you the structure you need to make wise spending decisions. Once you’ve created a reasonable budget, set systems to help you stick to it. For example, if you’re tempted by credit cards, put them away and only use cash for a few months. This should help build your patience while lowering your future debt.

Why do most people take out multiple payday loans?

Most people take out multiple payday loans because they come with such high fees and need to be repaid so quickly. In fact, most borrowers end up paying more in fees than they receive from payday loans, according to the Pew Charitable Trusts.

It’s easy to see why: Payday loans often need to be repaid in just two weeks. This leaves borrowers little time to find enough money for repayment. On average, most individuals who take out payday loans shell out $520 in fees to continually borrow $375 over the course of a year.

This is how payday loans trap consumers in debt. In fact, the Consumer Financial Protection Bureau estimates that over 80% of payday loans result in the borrower taking out another loan to pay off the first. Payday loans are so expensive that many borrowers can’t seem to find a way to pay them back.

Ask an expert

Logan Allec
  • Logan Allec
  • CPA
  • Founder of personal finance blog Money Done Right

Bottom line

It’s not necessarily easy to get out of a payday loan cycle, but it is possible. By consolidating your payday loans and paying down your debt, you can work your way out of a debt spiral while building good financial habits.

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