Are you stuck in the payday loan trap and searching for a way out? Are you tired of reading through the same old “how-to” guides telling you to start with high-interest loans first?
Payday loan debt is unlike other types of debt because the payments can quickly eat up your entire paycheck. This calls for a different strategy, which we have outlined here for you based on research, experience and dozens of conversations with other borrowers who turned to payday loans in a pinch.
Stuck in payday debt?
DebtHammer can help.
Here are the 8 steps to get out of a payday loan nightmare
DebtHammer Founder and CEO Jake Hill is an expert at helping people escape the payday loan debt trap. He says carefully following these eight steps will help you get out of a payday loan nightmare.
- Stop the automatic debits to your account immediately
- Negotiate with your lenders and request a payment plan
- Use the snowball method; start with the lowest balance and work your way up
- Use lower-interest debt to pay off higher-interest debt (if possible)
- Stop borrowing additional payday loans immediately
- Start a budget immediately – and stick to it
- Pay as much as you can towards your payday loan debt
- Consider bankruptcy (as a last resort)
+ Additional steps you can take to avoid payday loan debt in the future
1. Stop the automatic debits to your account immediately
You probably had to give permission to your payday loan company to debit your bank account automatically. To escape the payday loan trap, you must take back control of your checking account and stop payments immediately by sending a revocation of authorization to initiate electronic debits and following 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 with your lender, and inform them that you are struggling to repay all of your debts and are currently exploring options. Be sure to let them know that you will keep an open line of communication throughout your research/resolution process.
It’s also critical at this point to stop all unnecessary spending immediately.
2. Negotiate with your lenders and request a payment plan
Payday lenders may not be the most pleasant people in the world, but they do want their money back. Plus, now that you have them out of your bank account, you now have control of the situation.
Contact your lender and ask for better repayment terms. Ask specifically for a hardship plan or an “extended payment plan” (EPP), which is standard terminology most lenders will understand. Your best shot at getting one of these is if you keep an open line of communication with your lender. If you’re currently experiencing a temporary financial hardship (illness, job loss, etc.), communicate this with your lender, and make sure to keep your story straight.
If you decide that you may need a little help with this step, learn more about our payday loan relief programs first.
If you choose to negotiate yourself, do your research first
- How many loans do you have?
- How much have you paid?
- How much do you still owe?
- Is your lender licensed to lend money in your state?
- What is the interest rate? Is this compliant with state regulations?
- Are payday loans even legal in your state?
Will DIY debt settlement work for you?
DIY debt settlement involves two ideas:
- Use one bigger loan to roll all of your payday debts into one bigger debt, ideally with a lower interest rate.
- Allow yourself to default and negotiate a settlement with each of your lenders one by one.
No rule says you must choose one or the other. Depending on your situation, you may blend both methods together.
DIY debt settlement is best for those who can stay organized, manage stress and anxiety, and aren’t afraid to negotiate.
READ MORE: How does debt settlement work?
If a lender isn’t budging, inform them that you are exploring bankruptcy and that you would really like to avoid that option if possible. Because most lenders know they won’t get paid if you file for bankruptcy, this usually gives them some incentive to negotiate with you.
3. Use the snowball method; start with the lowest balance and work your way up
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.
First, start with necessities. Rent, car payments, utility bills and groceries must come first. Debt comes second.
Sit down with your bills, break down exactly how much you’re spending per month, and then calculate your monthly income. See how much is left over after your necessities have been covered. That’s what you have left to work with. (Sign up for a free budgeting app if you need some extra help.)
With your leftover money, make the minimum payment on all of your other debts, then put whatever is left toward your smallest payday debt balance. Eventually, when the smallest is paid off, you can move on to the next smallest, and so on, until you’re down to only one monthly payment. This is known as the snowball method.
Why is the snowball method better than the debt avalanche method?
The avalanche method can also be an effective strategy, which involves paying your debts with the highest interest rate first. Still, it doesn’t provide the same morale boost you get from steadily watching the number of monthly creditors you have to pay decrease.
Getting out of payday loan debt is not easy. That’s why the morale boost that the snowball method provides is crucial. You’re going to need a positive outlook on this situation. Anxiety and depression are your worst enemy throughout this process.
Is a personal loan an option?
Many of those stuck in payday loan debt simply cannot qualify for other loans, but if you have a credit score above 600, it’s at least worth a try.
A personal loan is an unsecured loan that you pay back in installments over anywhere from one to seven years. Interest rates vary but are usually capped at around 36%. If you can qualify for a personal loan, use the cash to pay down your payday loans and as many of your other high-interest debts as possible.
Then pay as much as you can afford each month on your personal loan. Since you can use the loan to pay off multiple debts, you can ward off additional fees because you only have one monthly payment to deal with.
Apply for a personal loan and use it for payday loan consolidation
Personal loans are installment loans with higher interest rates than traditional debt consolidation loans, but can also be used for debt consolidation. They will likely be cheaper (and have better terms) than high-interest loans from payday lenders — even if you have bad credit.
4. Use lower-interest debt to pay off higher-interest debt (if possible)
If a personal loan won’t work for you, you still have a few other options. Some people will genuinely not qualify for any of these alternatives. You are genuinely lucky if you do.
Apply for an installment loan or debt consolidation loan if your credit is above 600
Hands down, this is the best way to get out of debt — if you can qualify. You can negotiate settlements first and then use the money from your consolidation loan to pay the settlements. Use a good calculator to figure out how much you need to borrow and use it to pay off your other debts.
Any lender not granting an extended payment plan should be paid first.
You can get these types of loans through:
- A bank or traditional financial institution
- Credit union
- Online lender
Other (better) debt-relief options
- Payday alternative loans: Some credit unions offer Payday Alternative Loans (PALs), which are short-term loans with reasonable interest rates. The National Credit Union Administration sets rules and guidelines for PALs, making them a cheaper option than payday loans.
- Credit card cash advance: Cash advance APRs (annual percentage rates) are high — up to 35% or so — but not nearly as high as payday loans. Carrying a high credit card balance certainly will impact your credit score, but it is well worth it if it means you can escape the payday loan cycle.
- Peer-to-peer lending: Various loan platforms will help you meet investors who are looking to loan money to borrowers who may not qualify for a traditional loan. In addition, you could try to borrow money from a stranger on Reddit through the r/borrow subreddit.
- Borrow from family and friends: This is never a conversation anyone wants to have, but your family and friends don’t want to see you struggle and, if they can help, will certainly want to. There are even documents online to help you draw up a repayment plan.
- Religious and community organizations: Many offer programs that help people with immediate needs. Ask around or call your local food pantry for recommendations.
5. Stop borrowing additional payday loans immediately
At this point, you must stop using short-term loans altogether. This includes payday loans and title loans. These are some of the worst financial options out there. More than 90% of borrowers end up regretting their original payday loan.
It’s no surprise that 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 financially devastating.
Hide all of your credit cards but one for emergencies. Use cash to pay for items. You must stay within your budget for the next few months while you get your debt under control. If you absolutely must, use a cash advance app like Dave if you run into a true crisis (car repair, etc.) that would jeopardize your income.
READ MORE: Best cash advance apps
6. Start a budget immediately — and stick to it
Nobody likes going without, 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 aside for an emergency fund (preferably in an online account where it’s not easily accessible.) Then pay what you can afford toward your debt. 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. If the numbers don’t work out, there are some easy ways to eliminate expenses and balance things out.
READ MORE: How to start a budget from scratch
8. Pay as much as you can toward your payday loan debt
This is where you sit down with all of your debts and rank them from smallest to largest. Then take the amount of cash you have left in. your budget and start scheduling payments. Start with the largest loan amount and schedule the minimum payment. Then go to the next largest, and so on. Set up autopay for the minimum payment each month, so you don’t have to worry about incurring late fees. When you get to the smallest bill, pay the largest amount, the entire amount you have left. Keep doing this until that bill is paid off. Then move on to the next smallest bill. Repeat as needed.
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
If you can’t do this yourself, hire professional help
Many people may not have the discipline or self-control to complete these steps on their own. A professional credit counselor or debt settlement company could help you navigate the process.
- 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 $50, depending on the complexity of your financial situation.
- Debt settlement: Debt settlement 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.
Reasons why you may need professional help
- 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
Need professional help?
We may be able to help. It’s easy and free to find out.
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, be sure to seek legal advice first. Many law firms will offer a free initial consultation to discuss your options.
Additional steps you can take to avoid payday loan debt in the future
Here are some of the next steps once you’ve moved past your immediate crisis:
Repair your credit
Bad credit is the reason you are in this situation. Sign up for programs that will help you repair your credit score so that the next time you need to borrow money, your score will be high enough to pass the credit check for a traditional loan. This can mean a credit-builder loan from a lender like Self or signing up for a program like Experian Boost, which gives you credit for paying monthly bills that usually aren’t reported to the three major credit bureaus (Experian, TransUnion and Equifax.) Be sure to watch out for credit repair scams, though.
Make adjustments to your lifestyle and spending habits to avoid taking on more debt
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 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
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. It’s OK to set aside money for fun activities, but make sure they’re the ones you truly enjoy.
Educate yourself about personal finance
Knowledge is power! Taking control of your money will not only make you feel like you have your life under control, but it will also give you a clear idea of where it’s going each month and where you can reduce your expenses to build savings. Savings is important. About 27% of Americans have no emergency fund at all. You need to be prepared in case something unthinkable happens: A sudden hospitalization, health crisis, car breakdown, etc. An emergency fund makes these more of a setback than a financial catastrophe.
READ MORE: Best personal finance blogs
The bottom line
If you’re struggling, know that you’re not alone. According to the Consumer Financial Services Association of America (CFSA), approximately 12 million Americans use small-dollar loans each year.
The key to becoming debt-free is to stop spending more than you earn. While that sounds simple, there’s a reason why Americans have so much credit card debt.
When your debts are tackled, stash that extra money away each month until you’ve built up an emergency fund and savings account, use budgeting apps and keep track of where your money is going. Sign up for a credit-builder loan or a service like Experian Boost that will help you build your credit score.
Read personal finance blogs for advice from people who’ve escaped the payday loan trap and learn from their experiences. Most importantly, stay away from payday lenders. It’s a system that sets you up for failure.
When you take out a payday loan, most payday lenders require you to set up an ACH (Automated Clearinghouse) payment, which automatically debits your account. It’s perfectly legal to stop these payments, but it requires completing a few steps. You can also request an extended payment plan, which is also known as an EPP loan. You can also check to ensure that your payday loan is legal. Many state laws prohibit payday loans or cap the interest rate. If you find out that your payday loan violates state law, you may not be legally obligated to repay it.
It’s unlikely, though there is a chance if your payday loan meets certain criteria. This includes
1. Your payday lender is not licensed to do business in your state
2. Your loan is through a tribal lender
3. Payday loans are not legal in your state or the loan is in violation of a state law
4. The statute of limitations on your loan has expired
If your loan meets any of these criteria, you should immediately contact your bank to stop automatic payment. You should also contact a lawyer (many offer a free initial consultation) or your state attorney general’s office for guidance on how to proceed. You do not want to end up in court over a loan misunderstanding.
Some payday lenders are willing to negotiate with you, but not all will be open to negotiating. It never hurts to call and ask. Some may offer an extended payment plan, or EPP. The most important thing is to keep your loan from being turned over to debt collectors. If you can’t pay and your lender is unwilling to negotiate, consider a Payday Alternative Loan or cash advance app, request overtime, take on a side gig, or ask your family or friends for help.
You must immediately stop using payday loans. More than 90% of payday loan borrowers regret their original payday loan. Once borrowers are sucked in, breaking the cycle is very difficult.
If you need payday loan help, there are some effective ways to pay off multiple loans. This includes balance transfer credit cards, new loans or payday loan relief programs.