Payday loans are a bad idea. A bad payday loan can trap you in a debt cycle in which you can never get out.
Payday loans are bad because they are usurious interest rates – even higher than the average credit card rate at 17%. I've seen payday loans charge 10% a month to make it seem to the borrow that it's a reasonable rate. But 10% a month is over 120% a year!
If you are stuck in a bad payday loan, this article will give you some ideas on how to get out.
Just know that you are not alone with your payday loan. Almost 12 million Americans use payday loans each year, paying some $9 billion in loan fees.
What Is A Payday Loan?
To improve your financial life and your financial acumen, it's first a good idea to learn as much as possible about finances. In this case, payday loans.
Payday loans are short-term loans with usually high interest rates that are targeted to be repaid by your next payday. If you do not pay the loan off by the next payday, as many lenders hope, you will be charged an even higher loan interest rate that could easily trap you in a vicious debt cycle.
Many payday lenders don’t even check your credit report, which is why the average credit score for many payday borrowers is below 680. Payday lenders will want to see a pay stub or income source of some kind, as they still want to ultimately get paid back.
Payday Loans Have Some Of The Highest Interest Rates
The biggest issue I have with payday lenders is the interest rate. We're talking an interest rate of 100% – 500% per annum. But because payday lenders advertise a bi-weekly or monthly interest rate, the interest rate looks much cheaper to borrowers.
Because the interest rates on these loans are so high, roughly 80% of borrowers find themselves unable to pay the entire owed amount back at the due date. As a result, they roll over or renew their loans with a higher interest rate and never end up getting out.
Here's an even scarier fact. Roughly 12% of borrowers of payday loans ask for an extension 10 times or more!
Here are some other facts about payday loans to know:
Borrowers Pay More In Fees Than Their Original Loan
- The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375.
- Payday loans are usually due in two weeks and are tied to the borrower’s pay cycle. Payday lenders have direct access to a borrower’s checking account on payday, electronically or with a postdated check. This ensures that the payday lender can collect from the borrower’s income before other lenders or bills are paid.
- A borrower must have a checking account and income to get a payday loan. Average borrowers earn about $30,000 per year, and 58 percent have trouble meeting their monthly expenses.
- Although payday loans are advertised as being helpful for unexpected or emergency expenses, 7 in 10 borrowers use them for regular, recurring expenses such as rent and utilities.
- Auto title loans are similar to payday loans, except that the average loan is $1,000 and is secured by a borrower’s car title. Roughly 2.5 million Americans spend $3 billion on auto title loan fees each year.
- Payday loans are available in 36 states, with annual percentage rates averaging 391 percent. The other states effectively prohibit these loans by capping rates at a low level or enforcing other laws.
Payday Loans Are Unaffordable
- The average payday loan requires a lump-sum repayment of $430 on the next payday, consuming 36 percent of an average borrower’s gross paycheck. However, research shows that most borrowers can afford no more than 5 percent while still covering basic expenses.
- As a result, most borrowers renew or re-borrow the loans. This explains why the CFPB found that 80 percent of payday loans are taken out within two weeks of repayment of a previous payday loan.
Ways To Get Out Of A Bad Payday Loan
As the saying goes, if you're in a hole, stop digging. Here are some ways to get out of the payday loan debt cycle. I rate payday loans as the worst type of debt to get.
1. Get A Lower-Interest Rate Loan
You may have bad credit. You may have a relatively low income. But I'm pretty certain that your payday loan is the most expensive debt option out there given the average APR is 391%!
Meanwhile, the average personal loan rate from a reputable company is closer to 10%. See the chart below.
You can apply online for a personal loan from Credible. Input your needs and you should be able to get real quotes in under three minutes. Credit is a lending marketplace then enables you to easily shop around for personal loans in one place.
2. Get A Payday Alternative Loan (PAL)
Credit unions offer these loans that range between $200 and $1,000, with terms between one and six months. Up to three such loans can be granted to a borrower during a six-month timeframe.
One of the major advantages is that credit unions typically charge an application fee of no more than $20 and interest at an annual rate not to exceed 28%. It’s also possible the credit union won’t even perform a credit check.
The easiest way to get a PAL is to walk into your closest credit union, explain your payday loan situation, and ask if they have the PAL option.
3. Withdraw Cash From Your Credit Card
Although I absolutely hate using a credit card to withdraw cash, anything is better than paying a payday loan interest rate. Hence, you may want to use a credit card to pay off your payday loans.
The average cash advance interest rate is about 24 percent, or 7 percentage points higher than the national average rate charged on consumer credit cards. Further, you have to typically pay a 5 percent withdrawal fee, or $10, whichever is greater. In other words, if you get a $500 cash advance to pay off your payday loan, you will have to pay $25 for the money + 24 percent a month.
But again, paying $25 + 24 percent is much better than paying hundreds of percent for a payday loan!
4. Borrow From Family Or Close Friends
Borrowing from family and close friends is tough because you have to swallow your pride and admit you messed up or are in a bad place. That said, a good family member or friend who has the funds can get you out of your payday loan quick, perhaps without even charging you interest.
A lot of good family members and friends may also be willing to charge you a 0% interest rate.
Just beware that if you take advantage of your family and friends, you might lose them, forever. If you don't lose them, you may create a perpetually awkward situation that will hurt your relationship.
When you ask a family member or friend for money, it's best to write out your explanation, and highlight concrete steps on how you plan to pay them back and a promise that you won't get into any more debt. Ideally, you don't borrow from friends and family. Money tends to get in the way of good relationships.
5. Sell Off Your Belongings For Cash
Look around the house. Surely you have a ton of stuff that's just sitting around unused. Why not sell them on Craigslist or eBay to raise some cash, pay off your debt, and declutter your house? It's a triple win!
Spend 30 minutes aggressively gathering things you haven't used in over a month. Chances are high you won't miss them at all. Use the Konmari method to organize your life.
I'm looking around my house right now and I see about 30 t-shirts, 4 suits, 10 new shoes, and probably 80 books I could try and sell and raise over $1,000 online.
6. Work An Extra Job
In the internet age, nobody should just depend on one job to survive. We should all have multiple side jobs to generate income on top of our main job. Here are 20 side hustles to choose from.
My side hustle so happens to be writing about personal finance since 2009 on Financial Samurai My side hustle grew so much that by 2012, I had the confidence to walk away from a multiple-six figure job. I highly recommend everyone start their own website to at least brand themselves online.
You can driver for Uber or Lyft, assemble furniture on TaskRabbit, deliver groceries on Postmates, mow your neighbor's lawn and more. There are an endless amount of things you can do to earn extra income.
Payday Loans Should Be Illegal
I'm not sure why payday loans are still legal, given the usurious interest rates charged. It's bad enough that the average credit card interest rate is around 17% when the 10-year bond yield is below 2%. But to charge 20X higher an interest rate is outrageous!
You could file for bankruptcy if you feel there is simply no way out. But there is always a way out given the options I've highlighted above. I would exhaust every single one of my suggestions above first before filing for bankruptcy.
At the very least, you can check online for free to see what type of personal loan you can get.
Once you start gaining momentum about paying off debt, keep that money discipline alive. Do not take any excess risk you cannot afford. Do not buy things you do not need. Once out, stay out of the debt cycle for good!
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