In Over Your Head With Payday Loans? Escape the Trap for Good

Around 12 million American consumers use payday loans each year, borrowing an average of eight loans at $375 apiece. With the standard lender fees and interest rates, each loan costs around $520 after everything is paid.

If you feel like you’re trapped in a never-ending cycle of debt, you’re not alone. And fortunately, there are options to wake up from the nightmare without falling further into debt.

Payday loan horror stories

There are countless horror stories of people who’ve started with a payday loan and ended up in over their heads. For example:

One Speedy Cash borrower was unable to repay a loan after suffering from a bout of COVID-19 and losing one of their jobs. The interest continued to mount while the borrower searched for a new job. The account was sent to debt collectors and the loan balance is now more than $3,000.

“I didn’t get nearly this amount of money,” the borrower said.

Another person who used a payday loan from Plain Green Loans borrowed money in January 2022 and has been paying $245 every two weeks, with payments totaling more than $2,200, and the company says the borrower still owes $2,900

“This company needs to be investigated,” the borrower said.

A borrower who used a loan from Little Lake Lending used a $1,500 loan to cover some unexpected expenses. Payments of $199 were automatically deducted from his account every week, even though he was told they would be deducted every other week. By the time the loan is paid in full he will have repaid almost $7,000.

It doesn’t have to be like this. There are steps you can take to save yourself if you’re in over your head.

Try a payday loan consolidation or debt settlement program

Loan consolidation and debt settlement programs are both effective options for helping people manage their debts.

Payday loan consolidation lets you combine multiple debts into a single loan with one monthly payment and a lower interest rate. This makes handling the debt easier as there’s only one loan and one creditor. It also usually results in lower monthly payments, though some people end up paying more in interest over the life of the loan.

Depending on your credit, you could qualify for either a secured or unsecured debt consolidation loan. Speak with your financial institution or reach out to a credible online lender for your options.

Stuck in payday debt?

DebtHammer may be able to help.

Debt settlement programs are another possible solution to payday loan debt. These are offered through third-party, for-profit agencies that employ certified credit counselors to reduce your existing debts. They do this by taking on any eligible debts and negotiating with your creditors to get the total balances lowered.

During debt settlement negotiations, you’ll need to make regular monthly payments to a savings account or certificate of deposit (CD). Your creditors also won’t be able to automatically debit from your checking account, which can prevent overdraft fees. If negotiations are successful, the agency will pay the creditors the newly agreed-upon balance using the money you’ve set aside, usually in a lump sum.

Creditors are not legally required to settle debts. Most will only do it if the accounts are delinquent and they’re unlikely to receive any money otherwise. Because of this, some agencies recommend you stop making payments on your debts until they’re settled.

If you’re looking for debt relief that works, reach out for a free quote to learn how DebtHammer can help.

Watch out for scams

Beware of scams when seeking any type of debt relief, whether it’s for debt consolidation or debt settlement. Here are some of the biggest red flags, according to the Federal Trade Commission (FTC):

  • The company charges upfront fees — debt relief companies can only charge after they’ve completed their services
  • They pressure you to sign legally binding documents without reading them first
  • The company makes guarantees about how much debt they can settle
  • They claim to have access to special programs or resources that’ll help settle your debts
  • The company isn’t licensed or accredited by a legitimate organization like the Council on Accreditation
  • The loan or service comes with vague terms and fees
  • They have an unsecured website
  • The company claims to offer debt consolidation when they actually provide debt settlement

If you suspect that you’ve been scammed, contact the FTC, Consumer Financial Protection Bureau, your state attorney general’s office and/or local authorities as soon as possible.

Choose a strategy

The three most effective ways of dealing with multiple payday loans are:

  • Debt snowball method
  • Debt avalanche method
  • Debt consolidation loan

Each strategy has its pros and cons, just as each one works best for certain people and situations. Before choosing one, lay out all your loans and review them carefully. Take note of the current balances, interest rates, terms, and any hidden fees (ex. late fees) that come with them.

Debt snowball method: Pay off the smallest debts first

Sometimes, the best motivator is the satisfaction of paying off one debt at a time, no matter the balance.

The debt snowball method focuses on paying off the smallest balance first, regardless of the interest rate. Meanwhile, pay the minimums on any other debts so you can put more money towards that account.

Once you’ve fully repaid one debt, move on to the next smallest balance. Since you now have one less debt, you should also have more cash to put towards the next account. Continue this method until all debts are gone.

Debt avalanche method: Pay back the highest-interest loans first

If you want to save hundreds or thousands of dollars in interest and don’t need to see immediate progress, consider the debt avalanche method.

Start by choosing the account with the highest interest rate, regardless of balance. Pay as much as possible towards that account while paying only the minimums on any other debts. As the balance decreases, so will the interest fees. This means more of your money will go towards the principal balance.

If you have payday loans, focus on paying those off first to get out of debt sooner. While credit cards and personal loans cap out at around 35.99% APR, most payday loans have an APR in the triple digits.

Read more: Debt Avalanche vs. Debt Snowball: Which is the Better Debt Repayment Strategy?

Apply for a debt consolidation loan

Debt consolidation loans help you tackle many different types of loans, not just payday loans. You can roll your credit card debt, title loans and other high-interest loans into one bigger loan, ideally with lower interest rates. Doing this gives you one monthly payment, which makes it easier to track your progress as you pay down the debt. The monthly payment is usually more affordable, too, which lowers the risk of defaulting on the loan. When done right, it could also save you hundreds of dollars in interest.

The downside of debt consolidation is that you could worsen your debt situation if you continue using your available credit or take out more loans. Also, applying for a debt consolidation loan will cause a temporary drop in your credit score.

Want to learn more about the differences between the debt snowball and debt avalanche for tackling your debt? Check out this video:

Request an extended payment plan

Some lenders, especially those who are members of the Community Financial Services Association of America (CFSA), offer extended payment plans or EPPs. These plans let you increase the loan term, giving you more time to repay your debts.

One of the reasons why payday loans are so overwhelming is that they have short repayment terms and must be repaid in a lump sum. With an EPP, you can pay in smaller installments over multiple months. This lowers the risk of defaulting on the loan or ruining your credit.

Contact your payday lenders to see if they offer extended payment plans. If you do this before your current loan is due, you’ll have a better chance of success. And, if a representative says no, hang up and call again. Sometimes, a second or even third agent will give you a different answer.

Some EPPs come with a small setup fee. They also come with their terms and conditions, so read through any paperwork thoroughly before signing anything.

Review your credit report and learn your FICO score

It’s a good idea to check your credit report once a year to see where you stand.There are also a few steps that you can take if your credit score could use some improvement.

You can get a free copy of your credit report from annualcreditreport.com. Or you can request it from the three major credit bureaus — Experian, TransUnion, or Equifax.

Once you have it, check it for any errors. Even if it seems small, errors can significantly affect your credit score. Fortunately, you can dispute errors by filing a claim on the reporting bureau’s main website or by contacting the associated lender or creditor directly.

Read also: What is a 609 Dispute Letter? It Could Boost Your Credit Score

See if you can qualify for a new loan

Payday loans are easy to qualify for, even if you have poor credit, but they’re not the only options. Here are some options that could help you escape the payday loan cycle.

  • Personal loans: Personal loans come with lower interest rates than payday loans. For example, a personal loan through SoFi comes with an APR ranging from 5.74% to 21.78%. The better your credit, the better the rates. With a personal loan, you can use the funds for nearly anything from debt consolidation to paying off payday loans. Like any loan, these loans come with their own terms and interest rates. They also tend to require monthly payments.
  • Credit card cash advance: If you have a credit card, you might be able to get a credit card cash advance from your account. This lets you borrow against your existing credit line, which can be helpful if you need to repay payday loans. Cash advances often come with a service fee and have a higher APR than the credit card itself, but it’s still almost always cheaper than a payday loan.
  • Home refinancing or home equity line of credit (HELOCs): HELOCs are a form of revolving credit that is secured by the equity in your home. Depending on your situation, you could borrow up to 85% of the available equity. As with a credit card, you must make regular payments on the amount borrowed until the balance reaches zero. Since HELOCs have variable APR, you might pay more or less on certain months. Home refinancing lets you apply for a new mortgage. Most homeowners do this when the refinanced amount comes with a lower interest rate or more affordable monthly payments. With either option, you can use the funds to pay off high-interest payday loans or other debts.
  • Peer-to-peer loan: If you don’t qualify for traditional forms of financing, consider getting a peer-to-peer loan instead. This form of lending cuts out the middleman (financial institution) and lets borrowers and investors work directly together. The investor sets their own loan terms, rates, fees, and eligibility requirements. Just like with personal loans, you can use the funds for a variety of purposes, including payday debt consolidation. Check out platforms like Upstart or Prosper for options.
  • Payday Alternative Loans: Payday Alternative Loans, or PALs, are offered by credit unions’ as a more affordable alternative. They’re short-term loans with a maximum APR of 28% and can be repaid in installments over 1 to 12 months. These loans offer more consumer protections than payday loans, such as a capped interest rate and maximum borrowing amount. Borrowers can only take out one loan at a time, so there’s less risk of falling into a debt trap.

Look into credit counseling

Nonprofit credit counseling agencies employ certified credit counselors to help people with their finances and debts for free or at a low cost. These agencies typically offer:

  • Credit counseling
  • Budgeting help
  • Free educational resources or online workshops
  • Other money management and organizational help

Many nonprofit credit counseling agencies also offer debt management plans (DMPs), which last 3 to 5 years. These plans let you combine multiple unsecured debts into one affordable monthly payment until they’re repaid. They don’t cover certain secured debts, like car loans, but they can help with payday loans.

With a DMP, a certified counselor will negotiate with your creditors to try to reduce fees like interest rates.

You can find credit counseling agencies online on the United States Department of Justice’s website. Alternatively, you can check with your local government, military base, credit union, or university for assistance. Once you find an agency, check with the BBB for any consumer reviews and accreditation information it might have.

Borrow from friends and family 

Although it’s sometimes uncomfortable, borrowing from friends or family might be the best way to get out of payday loans without falling further into debt. Only borrow what you need and make sure both parties are fully aware of the terms. That way, you can keep your relationship secure while managing your debt.

Besides this, many civic organizations and churches have support systems where members can help one another through anonymous donations. Don’t be afraid to ask around if you’re in a tough financial situation.

Sign up for a cash advance app

Cash advance apps (like Dave) let you borrow a small amount — usually between $200 and $500 — against your upcoming paycheck.

As with payday loans, you must repay this amount by your next payday. Unlike payday loans, these apps are usually either free or come with a small monthly service fee. They also rarely come with interest or loan fees, so there’s no debt trap. You get the money quickly, usually within hours or by the next business day.

Some apps do come with a tipping feature, but this is not generally required. You will, however, have to connect a bank account and have a direct deposit from your employer. 

Other cash advance apps to consider include Brigit and Albert.

Ask for a pay advance

Some employers offer a pay advance, especially to employees in good standing. Before requesting an advance, look into your company’s policies. Generally, you’ll only be able to use this method once for an emergency.

You might need to submit a letter explaining why you need the advance, how much you need, and, in some cases, how you plan to repay it. Be respectful, transparent, and open to negotiating the terms of the request. Also, be prepared for them to say no.

Another way to receive all or part of your paycheck early is with a pay advance app like PayActiv. Instead of asking directly for an advance, these apps let you access your upcoming paycheck a couple of days early. However, your employer will need to participate for this to work.

Work overtime

Consider asking for more hours if you’re a full-time employee and your employer offers overtime. This is a great way to make extra money and pay off payday loans and other debts.

In some cases, such as when an employee works seven days in a row, they might be entitled to double-time pay. This is essentially double the regular rate of pay.

Do side jobs for extra cash

In today’s economy, nearly anyone can make extra cash doing a side gig on top of their main job. Depending on the side job and how many hours you work, you could easily make a few extra hundred dollars a month.

The options are virtually limitless.

File bankruptcy

Filing for bankruptcy can remove unsecured debts like payday loans, but it will destroy your credit and remain on your report for 7 to 10 years. Before considering this option, consult a law firm to see if they recommend it for your unique situation.

There are two main types of personal bankruptcy:

  • Chapter 7: Chapter 7 liquidates most, if not all, of your assets into cash to pay off creditors. Any remaining eligible debts are then discharged, including medical bills. This option also prevents debt collectors or creditors from pursuing payment.
  • Chapter 13: Chapter 13 lets you keep your assets, but you’ll need to set up a repayment plan that lasts 3 to 5 years. Upon successful completion of the plan, any remaining amount of unsecured debt will be removed. You’ll also need to participate in a credit counseling course.

Bankruptcy does not discharge certain debts, such as student loans, unless you can prove undue hardship. It will also cost you some money.

More payday loan horror stories

Shaun Connell, a Texas-based wealth-builder, business owner, and financial expert who founded Connell Media, has encountered far too many people who’ve become trapped in the payday loan debt cycle.

One of his clients, a former Head Start student, was a well-known and respected member of her community who worked diligently to keep up with her bills. In a tough time, she turned to payday lending. After several rollovers, her first loan was due in full. She couldn’t pay it off, so she took a loan from a second lender. Frantically trying to manage her bills, She eventually found herself with six simultaneous payday loans. She was paying over $600 per month in fees, none of which was applied to her debt. She was evicted and her car was repossessed.

Another client who lives in Texas with her husband and three children took out some payday loans through online lenders after her husband lost his job. After he started working again, they could never escape the debt trap due to excessive rollover fees. At one point, $800 a month of the family’s money was going towards payday loans.

The bottom line: Do NOT take on any more payday loans

If you’re already over your head, whatever you do, do not take on any more payday loans. If you do, you’ll just perpetuate the cycle of debt and make it even harder to get back on your feet.

You have some other options, but if nothing else is working for you, use a cash advance app instead. These work by letting you borrow a small amount of money from your next paycheck. So, they’re not a long-term solution, but they can help in a pinch. Keep in mind that these apps charge high fees, though they’re still less expensive than payday loans.

FAQs

Can payday loan lenders garnish my wages?

Payday loan lenders may be able to garnish your wages if you default on the loan and they successfully win a lawsuit against you.

Will I go to jail if I stop paying my payday loans?

Defaulting on loans is considered a civil issue, not a criminal one, so it won’t result in jail time. However, you could be required to go to court. If you fail to respond to a court order, a judge could theoretically issue a warrant for your arrest.

Will the government help me get out of payday loans?

Unfortunately, the government can’t get you out of payday loans. State governments can help by putting a cap on interest rates or making these loans illegal, though. If you’re looking for assistance, turn to other options like local organizations or credit counseling.

How do payday loans work?

Payday lenders market themselves as a short-term cash solution to emergencies. They’re easy to qualify for and typically only require proof of income, a bank account, and an ID card.
Most lenders offer same-day or next-day approval and funding, which makes these small loans seem like a good idea. However, the standard repayment period is two weeks. This gives payday loans an average APR of 396%. After adding up the interest and other fees, the average $375 payday loan ends up costing $520.
Because of the short repayment period and high interest rates, many borrowers can’t afford to repay these loans on time. This leads to a cycle of debt that can last months or even years. Most payday loan borrowers end up regretting their original payday loans. Payday lending is so predatory that the loans are outlawed in several states.

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