Payday loans can literally suck the life out of you. They may seem like the best option when you are strapped of cash, but they can plunge you in a never-ending cycle of debt.
By taking out a payday loan, it means your credit score sucks; otherwise, you’d have gone for a bank loan.
The payday lenders have also intentionally structured these loans in such a way that you’ll have to make full payment with your next paycheck otherwise they’ll keep rolling over your loan. This then makes them difficult to repay and very expensive.
So how do you end the vicious cycle and stop paying payday loans legally when you feel overwhelmed?
Why is it so easy to get trapped in a payday loan debt trap?
Payday loans are easy to access. All you need is an active bank account and proof of income.
These loans are unsecured, and your credit doesn’t matter. All you need to do is fill out the lender’s loan application form, and after approval which takes less than 30 minutes, the money would have been credited to your checking account. Easy, right?
The repayment schedule, however, isn’t as straightforward as you’d wish it to be.
Usually, these loans come with double digits interest rates and APR. In fact, according to a study conducted by Pew charitable trust, an average payday borrower pays $55 every two weeks to borrow $375 which is equivalent to 381% APR!
The repayment structure is in such a way that you have to pay off the full amount with your next paycheck. If you miss payments, the loan will accrue interest, you’ll be charged late payment fee, and in worse scenarios, you’ll even be sued by the lender.
Most borrowers end up rolling over their loans, and within no time, they find themselves in a debt trap that they can’t seem to get out of.
Since a majority of payday borrowers are low-income earners, they’ll take out these loans for the wrong reasons and spend them on their everyday expenses instead of using them for emergencies only.
It then becomes a vicious cycle which leaves the borrower with huge debts and penalties that are impossible to clear.
How to escape the debt trap
Here’s how you can escape payday loan debt traps and the financial distress that they cause:
- Build an emergency fund and avoid over-reliance on payday loans
Life is unpredictable, and sometimes it throws challenges that leave us in need of quick cash.
Having some money in a saving account can help you out on such days.
Start saving even as little as $10 per week. You can have the amount directly debited from your paycheck every month. This will help you out when you are stuck, and it will keep you from borrowing to fill the gap.
You can also make a budget and change your spending habits. Having a budget helps you track your income and expenses. It will also help you focus on necessities so that you’ll be able to free up some money to save.
- Sum up all your loans and start paying the high interest debts
Make a spreadsheet of how much you owe and write down the interest rates of each loan.
Pay off the loans with the highest interest rates first.
This strategy will help you avoid incurring more expenses due to the accruing interest.
- Negotiate for an extended payment plan instead of borrowing
You could negotiate with your creditors to allow you delay payment.
Some payday lenders are lenient to break down your payment into manageable installments.
Make sure you ask if there are fees for the extended payments.
Instead of borrowing to buy expensive items, you could wait until your paycheck arrives to make the purchase. You can also ask your employer for an advance to cover you up until your payment comes.
- Look for other alternative and less expensive source of funds
Instead of an online payday loan, you can apply for a credit card or get an affordable loan from a credit union.
Most credit unions offer its members low-interest loans payable in flexible monthly installments.
You can also borrow from friends and family but make sure you keep your promise to avoid breaking the trust.
Try to keep your credit card limits below 30% and use them only for emergencies. This will keep you from accumulating more debt than you can pay.
- Ask for payday loan debt assistance
If you can’t get rid of the payday loans despite putting in your best efforts, you can opt for debt relief to help clear off your debts and stop the harassing phone calls from debt collectors.
A debt relief company can offer you debt settlement or debt consolidation services to help you be debt free in no time.
They’ll negotiate with your creditors to waiver off the fees, accrued interest and charges on your loan and come up with a payment plan that’s both comfortable and affordable.
What happens if you can’t pay your payday loans
Apart from the interest and charges piling, you also risk being sued by the lender.
By stopping payment of your payday loans, you may be left with nothing to depend on for your daily expenses especially if you authorized automatic debits from your paycheck.
Funds will be automatically debited from your account leaving you to pay overdraft fees in case there are no funds.
So how do you stop payday loans legally?
You can legally stop payment in these easy steps:
- Revoking your authorization
If you authorized and signed for automatic debits, you can cancel and revoke that authorization.
Send a letter to the lender, and keep it as proof if he fails or refuses to grant your request.
You could also talk to your bank to stop any automatic debits if the lender does not comply with your request.
- Beware and stop automatic renewals
If you allowed automatic debits, you need to beware of renewals fees.
Some lenders deduct renewal fees only instead of deducting the entire loan amount.
These deductions don’t change the loan amount leaving you with the same loan balance.
- Know your rights as a borrower
When the collection calls come, don’t feel threatened or stressed out by threats of a jail term or other implications.
It’s illegal according to the federal law and if they tell you that, let them know you know your rights and you’ll report such threats to the financial service payment authority to take action against them.
- Talk about your experiences with the CFPB
If you had a nasty experience with any payday lender, tell your story to the consumer financial protection bureau.
Their sole mandate is to protect consumers from exploitation by unscrupulous payday lenders.
They’ll take up the case and help you out.
- Check if the lender is authorized to give out loans
If it was an online payday loan, there could be high chances that it’s illegal.
In some states payday loans are illegal so check out if the loan is legal.
If it’s not, you don’t have to pay.
Getting out of payday loans debt trap and never looking back may be an uphill task, but it’s worth the sacrifice and effort. Start rebuilding your credit scores and secure a solid financial future for you and your family. You’ll thank yourself for that.