A payday loan can seem like a quick and easy way to make ends meet while you wait for your next paycheck. The loan amount is usually small. You’re meant to pay it back on your next payday. But many people often find that when payday rolls around, they need the money in their paycheck to pay other bills. They end up extending the initial loan, either by paying the interest and fees owed or by taking out a new loan that covers the principal of the first loan, plus the cost of fees and interest.
Borrowers can end up trapped in a cycle of borrowing and borrowing again, filled with regret and never really paying off their loan. An extended payment plan can help borrowers break the payday loan cycle, but is it the best option?
What is an extended payment plan (EPP)?
An extended payment plan (EPP) is exactly what it sounds like. It lets a borrower spread out the payments on their loan over an extended period. Instead of having to pay the full amount of the loan, plus interest and fees, on their next payday, a borrower can choose to pay back their loan in installments. Often, the installments are due once a week, over a four-week period.
Compared to renewing or rolling over a payday loan, choosing an EPP can seem like an effective way to break free from the payday loan trap. When a borrower rolls over their payday loan, they don’t make any payments toward the principal. Instead, they pay just the fee or interest due. With an EPP, a borrower can start to chip away at the principal owed until they finally pay it off.
How extended payment plans work
Payday lenders won’t usually offer borrowers an extended payment plan option automatically. To qualify for the plan, a borrower needs to request it. According to InFiN, a Financial Services Alliance, borrowers have until the end of the business day the day before their loan is due to request an extended payment plan.
To make their request, a borrower either needs to visit the lender in person or contact it online, depending on the method they used to get the loan in the first place. When they request an EPP, the borrower needs to sign a new loan agreement that breaks up the payment schedule into four parts.
Once a borrower gets an EPP, they can make payments according to the plan or they can choose to pay off the balance early, without paying a pre-payment penalty. Lenders that offer EPPs can’t charge borrowers a fee for choosing it. A lender can charge fees if a borrower misses payments under the EPP, though.
A borrower who thinks they might need an EPP should ask for it before they miss a payment on a payday loan. Once the borrower defaults or falls behind on payments, an EPP might no longer be an option.
Usually, when a borrower is paying back a payday loan under an EPP, they can’t take out additional loans with the company until they pay off the first loan. There might also be a waiting period following the EPP, during which time the borrower can’t take out another loan.
EPP and the law
The payday loan industry is a poorly regulated one. The rules restricting or allowing payday loans vary from state to state. What Mississippi allows might not fly in Kentucky, for example. The same is true about the rules regarding EPPs.
As the Consumer Financial Protection Bureau (CFPB) points out, some states require lenders to offer EPPs to borrowers. Some don’t. People living in states that don’t require EPPs can check to see if a lender is part of the Community Financial Services Association of America (CFSAA). CFSAA is a trade association that requires members to offer EPPs to borrowers.
Other repayment plans
An EPP can help borrowers avoid the payday loan cycle but might not be available to everyone. A lender might not offer it or a borrower might have already fallen behind on paying. Fortunately, other repayment options are available to help people free themselves from the payday loan trap. These options include:
- Debt consolidation: Debt consolidation helps borrowers break free from payday loans by consolidating their existing debt into a single loan. Usually, the consolidation loan has a lower interest rate and fewer fees than a payday loan.
- Debt management: A debt management plan (DMP) can also help borrowers get free from the payday loan cycle. Working with a nonprofit credit counseling agency, a credit counselor helps a borrower negotiates a lower payment with their creditors. The borrower then makes one monthly payment, which gets divided up among each lender.
- Payday alternative loans: Credit unions often offer payday alternative loans as a way to help borrowers free themselves from the predatory payday lending cycle. The interest rates on payday alternative loans can be higher than on other loans. But, they are usually much lower than the rates charged by payday lenders.
The bottom line
If you’re trapped by your payday loan and just need a few extra weeks, an extended payment plan could be the solution. But one may not be available, and it won’t help you if you can’t make the payments. Assess your financial situation to see if there’s a better option before you commit.
If you find yourself trapped in the payday loan cycle and want to get out, DebtHammer can help. Contact us today to request a free quote and to get on the path toward being debt-free.