Learn how to break free from the cycle of payday loans, which can trap borrowers in debt due to their high fees and interest rates. Discover practical options to alleviate your debt, such as seeking financial assistance from organizations in your area, contacting nonprofit credit counseling agencies, taking out a small-dollar loan from a credit union or bank, or borrowing money from a family member or friend.
Questions Answered in this Article
- What are payday loans? Payday loans are small, short-term loans that typically range up to $500 and are known for their high fees.
- How do payday loans contribute to a debt cycle? When borrowers cannot repay, their financial situation can worsen, leading to a debt cycle. Research indicates that four out of five payday loans are reborrowed after the initial two-week term, leading to an increase in debt.
- How can borrowers break free of payday loan debt? Borrowers can consider reaching out to organizations in their area that offer financial assistance, reaching out to a nonprofit credit counseling agency, taking out a small-dollar loan from a credit union or bank, or borrowing money from a family member or friend.
- Why are payday loans challenging to repay? The quick turnaround time on payday loans makes them challenging to repay. If borrowers need help financially when they take out a loan, they will likely be better able to repay it two weeks later, including interest.
- What regulatory measures are necessary to address the payday loan problem? Experts suggest that while consumer finance education can help, significant regulatory measures are necessary to address the payday loan problem. Farahi says, “It’s up to policymakers to ensure that we’re getting rid of these kinds of loan sharks, not up to consumers to learn how to swim with the sharks.”
Breaking the Payday Loan Cycle: Resources and Strategies to Alleviate Debt
In 2013, Sherry Shannon, a resident of Minnesota, sought a $140 loan from a payday lender when she ran short on cash due to her car breaking down. The lending process was swift and uncomplicated, as she signed the necessary documents, received the funds, and exited the premises within minutes.
However, when it was time to repay the loan, the exorbitant triple-digit interest rate, combined with her regular expenses, forced Shannon to take another loan. This cycle continued, causing her debt to escalate, and Shannon felt trapped and helpless. She resorted to paying off loans to make ends meet and avoid homelessness, leading her to believe there was no way out of her situation.
Shannon’s story is not unique. Approximately 12 million Americans use payday loans each year, as these loans are marketed as a quick solution to cover one-time emergency expenses. However, borrowers frequently use them to pay for recurring essential expenditures, such as rent and utilities, and the associated fees and interest can be astronomical.
Breaking the payday loan cycle is possible, mainly if you are familiar with the resources available in your community.
How Payday Loans Work
Payday loans are small, short-term loans that typically range up to $500 and are known for their high fees. According to the Consumer Financial Protection Bureau, a $100 payday loan for two weeks incurs $15 in fees, resulting in a 391% annual rate (APR). In comparison, financial experts consider 36% as the highest APR a loan can have and still be considered affordable.
Due to their easy accessibility, payday loans can seem like an effective solution for urgent financial issues. However, when borrowers cannot repay, their financial situation can worsen, leading to a debt cycle. Anne Leland Clark, the executive director of Exodus Lending, a nonprofit organization that helps families break out of predatory loan debt, says that payday loans can offer immediate relief and “retraumatize” borrowers.
The Dangers of Payday Loans: How Interest Rates and Fees Can Trap You in a Debt Cycle
Research conducted by the CFPB indicates that four out of five payday loans are reborrowed after the initial two-week term, leading to an increase in debt. Furthermore, most borrowers owe more in fees than their original loan amount. For example, Shannon paid $500 in fees, despite only taking out a $140 loan.
Clark notes that the quick turnaround time on payday loans makes them challenging to repay. If borrowers need help financially when they take out a loan, they will likely be better able to repay it two weeks later, including interest. While borrowers may renew their loans depending on their state, this requires an additional fee and can lead to a more challenging debt cycle.
Clark and Yasmin Farahi, the deputy director of state policy and senior policy counsel at the Center for Responsible Lending, stress that borrowers should not feel ashamed for being trapped in a payday loan debt cycle. They suggest that while consumer finance education can help, significant regulatory measures are necessary to address the problem. Farahi says, “It’s up to policymakers to ensure that we’re getting rid of these kinds of loan sharks, not up to consumers to learn how to swim with the sharks.”
Research Your Options: Financial Assistance and Nonprofit Credit Counseling Agencies
Shannon managed to escape the cycle of payday loans by obtaining a 12-month, zero-interest loan from Exodus to refinance her existing debt. Having overcome the challenge, she urges others to heed how quickly one can fall into a similar trap. While she acknowledges that seeking assistance may be difficult, she emphasizes the importance of reaching out for help before the situation spirals out of control. If you’re grappling with payday loans, experts advise considering the following options to alleviate your debt.
Research organizations in your area that offer financial assistance
In your local area, organizations are likely offering financial aid to those in need. These could be nonprofits, charities, or religious groups. Some organizations may address payday debt, similar to Exodus in Minnesota, while others may provide general financial assistance to cover essential expenses like rent or groceries. Consider using the money you save on these expenses to pay off your payday debt.
Reach out to a nonprofit credit counseling agency.
Consider reaching out to a nonprofit credit counseling agency for assistance. These organizations specialize in helping individuals with their finances, including strategies for getting out of debt. Credit counselors can assist in creating a budget, managing bills, and exploring options for debt repayment, such as a debt management plan. Under this plan, you pay the credit counseling agency, which pays off your creditors and may charge a fee for their services.
To find a reputable nonprofit credit counseling agency, consider contacting the Financial Counseling Association of America or the National Foundation for Credit Counseling. It’s recommended that you research and choose an organization that provides information about their services for free, allowing you to decide if it fits your needs.
Take out a small-dollar loan from a credit union or bank.
Consider taking out a small-dollar loan from a credit union or bank to help pay off your payday debt and replace it with a more affordable loan. Many credit unions offer small loans, including alternative payday loans (PALs), with borrowing costs capped to keep the loan affordable. To apply for a loan, you’ll need to become a member of a credit union, which is often easy and affordable. Some federal credit unions offer PALs that allow you to apply immediately and have higher loan amounts. Banks are also increasing their small-dollar lending, although you’ll usually need an existing account in good standing to use. However, it’s worth contacting the bank to explain your situation and see if they can offer you a loan, even if your account isn’t in good standing.
Borrow money from a family member or friend.
If you’re struggling to get financial assistance from an organization or a financial institution, consider contacting your network for help. Borrowing money from a family member or friend can be uncomfortable, but you can make it easier by writing the agreed-upon loan terms. Be clear about how and when you will repay the loan and if you will pay interest.
Remember that many people face financial difficulties at some point in their lives. If you can get back on your feet, you may be able to help someone else in the future.
Summary
- Payday loans are marketed as a quick solution to cover one-time emergencies, but borrowers frequently use them to pay for recurring essential expenditures, such as rent and utilities.
- Breaking the payday loan cycle is possible, mainly if you are familiar with the resources available in your community.
- Payday loans are small, short-term loans that typically range up to $500 and are known for their high fees, with a 391% annual rate (APR) for a $100 loan for two weeks.
- Four out of five payday loans are reborrowed after the initial two-week term, leading to an increase in debt, and most borrowers owe more in fees than their original loan amount.
- Borrowers should not feel ashamed for being trapped in a payday loan debt cycle; significant regulatory measures are necessary to address the problem.
- To alleviate payday loan debt, consider researching organizations that offer financial assistance, reaching out to a nonprofit credit counseling agency, taking out a small-dollar loan from a credit union or bank, or borrowing money from a family member or friend.
