Updated: Feb 28
Everyone that's taken out a payday loan knows that it just turns into a seemingly endless rabbit hole of payments. Thankfully, that doesn't have to be the case: there are ways to get unstuck from payday loan debt.
What Are Payday Loans?
It is incredibly common for payday lending to be done even if borrowers do not have the means to repay. The Consumer Finance Protection Bureau (CFPB) used to have measures that were meant to curb them, but those were recently rescinded. Unfortunately, that means it's more likely now to avail of expensive loans. Their qualities are generally the same:
High interest (annual percentage rates that are 400% and beyond)
Short repayment periods (around two weeks)
It's a dastardly combination that leads to a vicious, expensive cycle of loan extensions. There are a pair of varying procedures for payday loan extensions, with the same bottom line in terms of cost increases. One of them is paying a fee, such as the loan's interest charge, on the day the full repayment is due. It allows the loan to go on without it getting paid down at all. So yet again, two weeks later, the total amount owed on the original loan will be due.
The other one is far more expensive. Aside from possible fees, the borrower won't pay on the due date of the original loan. Instead, they will have to take out a new loan for the original loan and interest owed. An all-new charge with higher interest is then added. It's like a fast-track push towards debt escalating even more in short notice.
Defaulting On A Payday Loan
When a person defaults on a payday loan through missed payments, lenders tend to turn debt over to collections pretty fast. It leads to bigger problems because it leads to a dent in the form of a negative entry on their credit file.
CFPB conducted a study that found nearly all payday loan borrowers (around 80 percent) extend loans at least once. Roughly 12 percent of borrowers overall (approximately 15 percent of the aforementioned 80) renew their loans at least ten times. That's a lot of funds altogether that doesn't even go towards paying down the original loan!
In some states, laws restrict payday lenders in terms of the renewals they can offer. Payday lenders who are part of the Consumer Financial Services Association of America (CFSA), a trade group of payday lenders, now have only four renewals per loan. They only go over that limit when local laws in their state have higher limits.
Some of the best ways to break a payday loan cycle include:
Debt consolidation loans
Debt management plans
Extended payment plans (EPP)
Payday alternative loans (PALs)
Payday loans are more common nowadays, especially since previous restrictions have been rolled back. They usually end up in a cycle involving higher interest and renewal fees that don't pay the original loan down. They can be paid down through peer-to-peer loans, extended payment plans and debt management plans.
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