Payday Loans and How to Break the Paycheck-to-Paycheck Cycle
February 14, 2018 | By Emma Frost
Debt: it’s one of those four-letter words that no one likes to think about. But most of us have it, and even if you’re debt-free now, we’ve all had it at one point or another.
Americans are just addicted to debt. It’s how we purchase the bigger things like our cars and homes, and even our businesses, for those of us entrepreneurs. No matter how much we make and how much we might scrimp and save, it’s a necessary evil for those comforts and commodities we rely on in our everyday life.
And, while a lot of emphasis is placed on one side of the coin (credit) not much time or consideration is devoted to the other until it’s already spun out of our control: the debt that builds when we utilize credit. That’s what we’re here to discuss today.
No one likes debt; it’s one of those harsh realities that most of us have come to expect. And when you feel like you’re sinking in the quicksand of debt, it can feel downright suffocating. It’s no wonder that over twelve million Americans turn to payday loans every year to fill in the gaps. But what those twelve million might not know is that it results in a whopping $9 billion in loan fees, as reported by Pew Charitable Trusts.
Why is that number so high, you might ask? It all comes down to how much research and planning went into budgeting your repayment. Most of this cost comes from being unable to repay the loan in time.
In fact, the Consumer Financial Protection Bureau reports that 60% of those same twelve million will find themselves trapped in the vicious cycle of the paycheck-to-paycheck lifestyle, where they find themselves paying more in fees than the original amount they took out. It makes for a carousel of ups and downs that ebb and flow as your finances do, leaving us losing more than just our lunches.
If you need fast cash but want to make sure you don’t buy a ticket on the merry-go-round of fail, here are the top reasons people find themselves there and the financial strategies you should consider to avoid being another statistic.
Why Is It So Easy to Get Buried in Payday Loan Debt?
For the answer to that, we have to go back to what payday loans are designed to do. Like any financial product, they aren’t just meant to help people who need money, fast. They’re also there to make money for the companies who provide them. And as we have already reviewed, they make a lot!
Payday loans are unsecured loans, meaning there’s no collateral involved, which can sound great to a potential borrower, but there’s a word of caution to this tale. Payday loans are designed to make money, and the best way to do that is to get you to come back for more. Here are some things to consider before making the plunge:
- Don’t borrow for the wrong reasons. About 70% of payday loan customers use that money toward their everyday essentials instead of an emergency expense.
- Define “short-term”? Payday loans are marketed as easy short-term financial tools, but the average borrower will spend five months in debt. That’s a lot longer than one payday!
- Loan fees are no joke. Loan fees average about $55 every other week; for someone borrowing $375 to get them to their next payday, that means they may end up paying $520 a year. It’s no laughing matter.
- Don’t get caught in a vicious cycle. The average payday loan user would need to hand over $430 on their next payday to pay off their loan, which is money they may not have if they were borrowing to begin with. That’s why so many end up extending and even renewing their loan instead of paying it off in full. In fact, about 80% of all payday loans are taken out only two weeks after their last one was paid in full. And that’s a cycle that can be hard to break from all at once.
What If I Can’t Pay Off My Payday Loan?
You should always make every effort to pay your loan off as quickly as possible to avoid tacking on fees and penalties. If you don’t, your lender may even resort to taking legal action to get their money back. And if you’re using an auto-pay feature, this could mean paying the broke tax when your account overdrafts. If you’re not careful, you could end up bombarded by collection calls with a depleted bank account and nothing more to show for it.
But all is not lost! There are still ways to stop this vicious cycle right in its tracks.
How Do I Break the Paycheck-to-Paycheck Cycle?
If you’re already caught in a vicious cycle, there is payday loan help out there if you know where to look! Start with the beginning: where did you take out the loan? And who is the lender?
The laws that govern payday loan lenders may differ from state to state. Your state may require your lender to work with you through an extended payment plan to prevent the fees and interest from snowballing into an avalanche of financial stress. Going to your lender and letting them know your situation is always the best first step.
Let’s take a deeper look into what you could do to eliminate your payday loan debt and break the paycheck-to-paycheck cycle for good.
Extended Payment Plans
Is your lender a member of the CFSA? Then you may be in luck! CFSA (Community Financial Services Association of America) best practices allow for payday loan customers to enter into an EPP (Extended Payment Plan) to give borrowers extra time to pay their loan without incurring additional penalties, which could help you avoid defaulting on a loan.
The best part is, as long as you keep making the agreed-upon payments on time, you can stave off those nasty collection calls. If you feel like your sinking in that debt quicksand, talk to your lender about whether they can offer this kind of agreement, and find out more about setting up an extended payment plan today!
Contact State Regulators
Does your lender refuse to play ball when you call to let them know your situation? Do a little homework on what your state regulations are for payday loans are and contact the agency that regulates them. You could end up negotiating fairer terms with a licensed lender or take action against an unlicensed one, but either way, it's a win for you. If your lender won't listen to you the first time, chances are they'll be more receptive when you bring back up.
File a Complaint
If you’ve tried speaking with your lender and reaching out to regulators, and you still aren’t making any headway, you can always file a formal complaint while you’re at it. You may be able to submit it through the state regulators or nationally through the Consumer Financial Protection Bureau. This creates official documentation that could be helpful later if there are grounds to take action against them.
Consider Other Lending Sources
It might seem counter-intuitive, but, if you plan it right, borrowing the money you need to wake up from the recurring nightmare of the paycheck-to-paycheck cycle might be just what the doctor ordered.
But it doesn’t have to limit you to seeking a loan from a traditional bank. You could get help from your local credit union or your friends and family if you have those options open to you!
There are also other choices like installment loans and title loans which offer you more money and could help you get your feet back on solid ground. If you own your own car, you could even keep driving while you make payments. It’s all about reviewing your options carefully and making the decision that’s right for you.
When EPPs aren't an option and you need help with your debt relief plan, credit counseling agencies may shine a light on where to take it from there. They're often non-profits that are meant to promote financial literacy and could offer help with managing payday loan and credit card debt as well as everyday budget management needs.
They may not get rid of your debt, but they could give you a better idea of how to get (and stay!) debt-free. Just make sure to do your homework to ensure you go with a reputable credit counseling agency so you don’t end up getting out of the frying pan and into the fire!
Debt Management Plans
One of the ways a credit counseling service could help you get out of debt faster is through DMPs or Debt Management Plans. With their help, you could work with your creditors to come up with a payment schedule and interest rate that work for both parties.
The requirements here are a little stringent, so you want to make sure you're on time with your payments and that you don't acquire more credit card debt while you're on a DMP. You should also carefully review your terms and conditions to avoid finding yourself in a bigger mess than you started out with.
Debt Settlement Programs
Unlike credit counseling services, debt settlement programs are typically created by for-profit organizations to “settle” your debt for a lump sum that is less than the amount you originally owed. All they require is that you set aside a certain amount each month to put toward that debt until you reach the full amount. It’s important to do your research and ask questions, however, and make sure your credit solution doesn’t turn into a problem itself.
The “b” word: anyone who’s found themselves here knows this already, but the bankruptcy option is more like a last resort or panic button when you’re really overwhelmed. When your debt had gotten totally out of control, however, it may be your best or only option. But that doesn’t mean it doesn’t come with consequences of its own.
Filing for personal bankruptcy could sometimes follow you and your credit score around for up to 10 years and could mean getting denied credit in the future. That might mean hitting a snag or two when it comes to buying a car, a house, or even getting a job in some cases. But if you’re caught in the wake of a financial crisis, it could be exactly what you need to do to get back on track.
What to Do After You Get Rid of Payday Loan Debt
The best way to be debt-free is to avoid biting off more than you can chew to begin with. But if you’re finally coming out on the other side of a financial mishap, our best advice is to avoid slipping back into the old habits that got you there.
Keep an eye on your credit and the factors that affect it, and make sure it’s accurate and up-to-date. Budget like there’s no tomorrow, and save as much as possible, even while you’re still paying off your debt. Seek help from friends and family, as well as lenders and credit counseling services. And just remember, you’re not alone.
Getting back on the right track might seem like an impossible task if you’ve gone far from the beaten path, but there’s always a way out of the paycheck-to-paycheck cycle. You deserve the liberty that comes with being debt-free and in control of your financial future.
Use these tips to get debt-free and stay that way, no matter what life throws your way. Take the first step toward economic stability now and break out of that paycheck-to-paycheck cycle once and for all!