It’s no secret that payday loans are bad. But the only way to break the debt cycle is to pay off your payday loan debt. This is easier said than done.
“I was having to get one to pay another,” payday loan user Trudy Robideau told NPR. “It’s a real nightmare.”
If you’re tired of reading the same old “how-to” guides telling you to start by paying off high-interest loans first, try this practical guide that actually works.
Table of Contents
How to get out of payday loan debt in 8 practical steps
DebtHammer Founder and CEO Jake Hill is an expert at helping people escape the payday loan debt trap. He created this strategy guide based on research, experience and hundreds of conversations with trapped borrowers. If you’re stuck in a payday loan nightmare, following these eight steps can help you break free.
- Stop the automatic debits to your account immediately
- Request an extended payment plan or hardship program
- Stop borrowing additional payday loans immediately
- Apply for a Payday Alternative Loan
- Use lower-interest debt to pay off higher-interest debt (if possible)
- Use the snowball method; start with the lowest balance and work your way up
- Start a budget immediately – and stick to it
- Consider bankruptcy (as a last resort)
+ Additional steps you can take to avoid payday loan debt in the future
Stuck in payday debt?
DebtHammer can help.
1. Stop the automatic debits to your account
When you got your payday loan, you probably had to give permission to your payday loan company to debit your bank account automatically.
The first (and most important) step to break free of the payday loan debt trap is to take back control of your checking account. Stop payments immediately by sending a revocation of authorization to initiate electronic debits and follow up with a phone call. Often, when the payments are automatically deducted from your account and you can’t afford them, it triggers multiple overdraft fees, which average around $35 each and can add up quickly.
Be polite but firm with your payday lender. Explain that you are struggling to repay your debts and are currently exploring options, including bankruptcy. Be sure to let them know you will keep an open line of communication throughout your research/resolution process.
Pro tip: It’s also critical at this point to stop all unnecessary spending immediately.
2. Request an extended payment plan or hardship program
This isn’t common knowledge, but payday lenders are often willing to work with you. Plus, now that you have them out of your bank account, you control the payments.
Contact your lender and ask for better repayment terms. Start by asking if they offer an “extended payment plan” (EPP), which is standard terminology most lenders will understand.
Many people aren’t aware that EPPs exist. According to a report from the Consumer Financial Protection Bureau, rollover and default rates are higher than EPP usage rates despite being considerably more expensive. The CFPB says this is because lenders discourage EPP use. CFPB Director Rohit Chopra said in the report that “payday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing.”
Pro tip: Lenders in some states are required to offer EPPs. However, they won’t volunteer this information. You will have to ask for one, and you will have to do it at least 24 hours before your loan’s due date. There is no extra cost for an EPP, except in Michigan, where a fee of less than $20 is allowed.
If they don’t offer an EPP, ask if they provide any hardship programs. Be honest. If you’re experiencing temporary financial hardship (illness, job loss, etc.), communicate this with your lender and keep your story straight.
Before you contact your lender, figure out:
- How many loans you have
- How much you have paid
- How much you still owe
- Whether your lender is licensed to lend money in your state (if your lender is not licensed, you may not have to repay your loan)
- What is the interest rate? Is this compliant with state regulations?
- Are payday loans legal in your state?
If you decide that you may need a little help with this step, learn more about our payday loan relief programs first.
3. Stop using payday loans — immediately
At this point, you must stop using short-term loans altogether. This includes payday loans and title loans. These are rarely a good idea and are even illegal in several states. More than 90% of borrowers end up regretting their original payday loan.
We know this is easier said than done.
Unsurprisingly, the Consumer Financial Protection Bureau (CFPB) found that more than 80% of payday loans lead to rollovers or a new loan within 14 days. Getting trapped in that cycle of debt can be devastating, both financially and emotionally.
Hide all of your credit cards but one for emergencies. Delete them from your digital wallet. Pay all necessary expenses with cash or a debit card. You must stay within your budget for the next few months while you get your debt under control.
Pro tip: If you truly need a short-term loan to power through an emergency, use a cash advance app like Dave, but only if you’re facing a genuine crisis (car repair, etc.) that would jeopardize your income or personal safety.
READ MORE: Best cash advance apps
4. Apply for a Payday Alternative Loan
These small loans are similar to payday loans, but they’re only available to members of federal credit unions. The maximum loan amount is $2,000; you can take up to a year to repay it. Interest rates are capped at 28%. You can then use the money from the loan to pay off your payday loans and then pay off this new loan in installments.
Joining a credit union is easy. There are even some national credit unions you can join online with only a single membership requirement: You must open a bank account with a nominal initial deposit (usually between $5 to $20).
READ MORE: Payday Alternative Loans
5. Use lower-interest debt to pay off higher-interest debt (if possible)
A new loan — with a lower interest rate — is usually the best way to pay off higher-interest debt. This is typically known as debt consolidation.
Unfortunately, some people will not qualify for any of these alternatives. So many people get stuck in the payday loan debt trap because they don’t qualify for better types of borrowing, like credit cards.
If your credit score is above 600, it’s at least worth trying to apply for a new loan with a lower interest rate.
A personal loan is an unsecured loan you pay back in installments over one to seven years. Interest rates vary but are usually capped at around 36%. If you qualify for a personal loan, use the cash to pay down your payday loans and as many other high-interest debts as possible. The loans can also be called installment loans and debt consolidation loans.
Then, pay as much as you can afford each month toward your loan. Since you can use the loan to pay off multiple debts, you can avoid racking up additional fees because you only have one monthly payment.
These loans will be cheaper (and have better terms) than high-interest loans from payday lenders — even if you have bad credit.
Pro tip: DebtHammer can instantly check with 15+ lenders to learn whether you qualify for a debt consolidation loan. Set up a free consultation today.
READ MORE: Need help now? How to get free money — and other assistance
6. Use the debt snowball method
Think about it. The top priority is getting your paycheck back if you’re strapped for cash. That’s why you stopped automatic payments on your bank account already. You can’t survive without a regular source of income. Now it’s time to prioritize.
Debt snowball is the method that starts by paying off the bill with the lowest balance, then working your way up.
First, pay off all of your necessities (utilities, rent, car payments, phone, groceries, etc.) Then, figure out how much money you have left over. Sit down with your bills and break down exactly how much you’re spending per month on minimum monthly payments. Once you’ve calculated how much is left after your necessities have been covered., that’s what you have to put toward your debt. (Sign up for a free budgeting app if you need some extra help.)
Pro tip: Don’t forget to budget a little bit each month for unexpected expenses. There’s no way to completely avoid them.
Use any leftover money to make the minimum payment on all your other debts, then put the total amount that’s left toward your debt with the smallest balance. Usually, this would mean starting with your payday loan since these usually max out around $1,000. When your smallest debt is paid off, move on to the next smallest, and so on, until you’re down to only one remaining debt.
Debt snowball vs. debt avalanche
The debt avalanche method can also be an effective strategy, but it works a bit differently. Instead of paying off your smallest loans first, you prioritize paying off the bills with the highest interest rates. However, debt avalanche won’t provide the same morale boost you get from watching the number of monthly bills you pay steadily decline. Debt snowball is a powerful motivator because you can see your progress.
Pro tip: Unless you win the lottery, getting out of payday loan debt is challenging. That’s why the morale boost that the snowball method provides is crucial. The process will be challenging. You may be anxious and depressed as you put most of your discretionary income toward debt. It will ultimately be worth it.
READ MORE: Debt avalanche vs. snowball: Which is the better repayment strategy
7. Start a budget — and stick to it
Nobody likes cutting costs or going without certain items, but a budget is essential for everyone. It’s not complicated. Figure out your essential vs. nonessential expenses. Set aside enough money to cover necessities, some extra spending money, and a little to tuck away for an emergency fund (preferably in an online account where it’s not easily accessible). Then, pay as much as you can realistically afford toward your debt.
Pro tip: Your budget may fail the first few months while you figure out the balance of wants vs. needs. That’s OK. Don’t get discouraged.
To help you make more progress, look for additional sources of income.
- Work extra hours
- Moonlight in the gig economy
- Sell stuff you don’t need
READ MORE: Are you drowning in debt? Here’s how to save yourself
Consider professional help
Many people may not have the discipline or self-control to complete these steps independently. A professional credit counselor or debt settlement company (like DebtHammer) will help you navigate the process.
- Payday loan debt relief: Also called debt settlement, this involves talking with your creditors and negotiating to get your debts reduced. Fees for this can be substantial, but you could also walk away debt-free without needing to file for bankruptcy.
- Credit counseling: A nonprofit credit counselor will work with you to create a debt management plan. The credit counseling itself is usually free or very low-cost; the fee for a debt management plan usually ranges from $15 per month to as much as $75, depending on the complexity of your financial situation.
Signs you need professional help
- You have $1,000 or more in payday loan debt
- You’re in way over your head with debt ($10,000+) and have lost control of your finances
- You’re working multiple jobs and don’t have the time or interest to do it yourself
- You literally can’t negotiate because you’re anxious or depressed
- Debt collectors are contacting you at home or work, and you’re afraid
8. Consider bankruptcy
Bankruptcy is the nuclear option, but it could offer the fresh start you need if you’re struggling with debt and don’t have enough monthly income to cover all of it. Keep in mind that there are some mandatory costs associated with filing, so it won’t be free. You’ll also need to take some time off work to appear in court and meet with your bankruptcy trustee. It will damage your credit score and remain on your credit report for seven to 10 years, depending on the type of bankruptcy you file, but chances are that if you’ve hit this point, your credit score is probably already pretty bad.
Pro tip: If you’re seriously considering bankruptcy, seek legal advice first. Many law firms will offer a free initial consultation to discuss your options.
Remember that you’re not alone
According to the Consumer Financial Services Association of America (CFSA), 12 million Americans borrow money from a payday lender every year. Many people with significant financial problems started with a single seemingly harmless loan. Payday loan debt is unlike other types of debt because the payments can quickly eat up your entire paycheck. It’s dangerously easy for a single loan to derail your finances.
Take Mary S., for example, who used a payday loan to buy Christmas gifts for her grandkids. She then spent over two years struggling to repay her original $500 loan.
Or Joe W., who borrowed $200 to pay for an unplanned doctor visit and spent more than a year rolling over loans and watching his loan balance grow instead of shrinking.
Almost half of Americans say they don’t have enough savings to cover an unexpected $400 expense.
Pro tip: The key is to take small steps and to get started now. The longer you wait, the harder it will be.
Can you get out of your payday loans without paying?
It’s unlikely, but not completely impossible. There are only a couple of ways to get out of payday loan debt without paying:
- Make sure your payday loan is legal. If you live in one of the states where payday loans have been outlawed, you might have an illegal loan that you won’t have to repay.
- Is your lender licensed by your state banking regulator? If not, you may not have to repay the loan.
- Check the statute of limitations in your state. Once that expires, lenders won’t be allowed to take you to court to get you to repay.
If you suspect your loan is illegal, you may not have to repay it. Consult a lawyer to figure out the next steps.
Don’t be afraid to ask for help
Almost everyone has experienced problems with debt at some point in their lives. Don’t be embarrassed to ask for help. If you feel uncomfortable discussing your finances with a friend or family member, set up a free consultation with a payday loan relief company or a nonprofit credit counseling agency. There is no reason to be embarrassed. We’ve all been there.
Not sure how to get started? Contact DebtHammer for help. Our consultation is completely free and we can help you navigate the process.
More steps you can take for debt relief
There are several ways you can reduce or even eliminate monthly expenses, including:
- Move to a cheaper area
- Find a less-expensive apartment
- Take on a roommate
- Pick up low-cost hobbies
- Cook at home rather than eat at restaurants
- Plan inexpensive entertainment like park visits
- Look for free community events or days when local museums, etc., have free or discounted admission
- Use coupons
- Sign up for grocery store loyalty programs
Above all, make your fun count. You don’t want to feel deprived or lock yourself at home watching your friends go out without you. Setting aside money for fun activities is OK, but make sure they’re the ones you truly enjoy.
READ MORE: 40 great savings tips to help you avoid a payday loan
The bottom line
The key to getting out of payday loan debt is to act now. Even small steps can help get the (snow)ball rolling.
Remember, don’t get discouraged if you’re stuck in a payday loan nightmare; you have options. Explain that you’re dealing with financial hardship and request an extended payment plan from your lenders. If that doesn’t work for you, consider a payday loan relief program or bankruptcy as the nuclear option. First and foremost, stop the automatic debits to your bank account and commit to stop borrowing from new payday lenders.
But no matter how tough it seems, avoid payday lenders. Otherwise, you’re setting yourself up for failure.
