Updated on Thursday, August 6, 2020
Payday loans come with high interest rates and fees, on top of short repayment terms of a few weeks. If youâ€™ve failed to pay off a payday loan debt, youâ€™ve likely rolled the balance into a new payday loan with additional fees. Once youâ€™ve entered a debt cycle â€“ where you use new debt to pay for old debt â€“ it can feel impossible to get out.
There are several strategies to escape payday loan debt, however, such as debt consolidation and debt counseling. Hereâ€™s what you should know about them.
Check if your payday lender is a member of the Community Financial Services Association of America (CFSA). If so, they are required by law to offer you an extended payment plan at no cost if you are unable to repay your loan in a single payment. However, you can only apply for an extension once a year, and the length of your extension varies depending on the state where you get the loan.
The benefit of an extended payment plan is getting more time to pay off your loan without racking up additional fees or service charges or ending up dealing with a collections agency.
A debt avalanche is a repayment strategy where you make additional payments on your highest-interest debt. In the meantime, youâ€™ll only make minimum monthly payments on your other debts. The quicker you pay off high interest debts, the less you will pay in interest over time.
Signing up for free credit counseling services from a nonprofit agency that can help you put together a reasonable plan to pay off debt. Youâ€™ll work with a credit counselor who is well-versed in assessing a financial situation and coming up with helpful, clear steps for paying down your debt. Your credit counselor may even recommend a debt management plan.
With a debt management plan, your credit counselor will negotiate with creditors on your behalf to potentially reduce fees and interest rates on your debt, as well as your monthly payments. They can stop collection calls and help you repay your debt, in full, over time. These services, including workshops and educational materials, can come with a monthly fee but may be free depending on your circumstances.
You can look for reputable nonprofit credit counseling agencies through places like your local financial institution or credit union, consumer protection agency, universities, military bases or housing authorities. You can also search by your state of residence on a list of agencies approved by the United States Trustee Program.
Federal credit unions are nonprofit alternatives to banks that could offer a great exit strategy, called a payday alternative loan, or PAL. These loans typically offer amounts between $200 and $1,000, with repayment terms of one to six months. Fees are capped at $20 and interest rates cannot exceed 28%, which is a stark contrast to what you could pay for predatory payday loans.
To get a PAL, you must have been a member of the federal credit union for at least one month. Some offer free financial counseling to their members, as well. You can search for credit unions near you at MyCreditUnion.gov.
Traditional personal loans are unsecured, meaning they donâ€™t require collateral, and are a common way to refinance or consolidate debt. They are offered by banks, credit unions and online lenders.
If you qualify for a personal loan, it could enable you to pay off your debt at a lower interest rate than whatâ€™s on your payday loan. Because personal loans come with longer repayment terms, usually from 12 to 60 months, youâ€™ll also have more time to pay off your debt.
Personal loan lenders typically require fair or better credit to qualify, however. If you donâ€™t qualify â€“ or youâ€™re only seeing high interest rates â€“ you could seek out a secured loan like a secured personal loan or home equity loan. Securing a loan with a tangible asset could get you lower interest rates, saving you money in the long term. However, it can also be riskier as you could lose the asset that you provide as collateral if you default on the loan.
Asking for help from loved ones can sometimes be difficult. However, if you canâ€™t qualify for a loan from a lender, consider asking a friend or family member for any cash they can spare.
Even if they do decide to charge you interest, their terms could be much more reasonable than what the payday lender is currently charging you. You could pay them back in small amounts and take the time you need to fully relieve your debt without additional penalties.
Remember, though, that borrowing money from friends and family can sour the relationship if you donâ€™t follow through on the terms you set. A February 2020 survey from LendingTree found that about 1 out of 3 family or friend lenders hadnâ€™t been paid back, and another third of respondents said the lending arrangement had negative consequences.
Consider increasing your income and your ability to pay off your debt more quickly by turning free time into extra cash â€“ at least temporarily. You might get a side hustle that wonâ€™t cut into your regular work schedule, such as:
Another option is to tap into the sharing economy by renting out your assets online, whether itâ€™s your parking spot or a spare room in your home.
Debt settlement could take place in one of two ways. One option is to hire a third-party debt settlement company to negotiate with your creditor and reduce the amount you owe the creditor.
The typical debt settlement process starts with you stopping payments on your existing debts and instead making monthly payments to an account the settlement company creates for you. After anywhere from 90 to 180 days, the debt settlement company will negotiate with your creditors. If thereâ€™s an agreement for a payoff amount, the settlement company uses the money in your account to pay.
This method carries significant risks, such as having to pay hefty fees to the settlement company and not reaching a solution with the creditor. In the meantime, you could incur significant damage to your credit rating or even be taken to court. Also, the IRS may consider some of the savings from your settlement as taxable income.
Another way is to try negotiating with your creditor yourself. Explaining your situation wonâ€™t cost you anything, but it could help you work out a more manageable repayment plan. You could be pleasantly surprised at your creditorâ€™s willingness to negotiate with you.
Although bankruptcy is a way to escape payday loans and other unsecured debts, it should be your last resort. Bankruptcy is a long and arduous process that will damage your credit and should only be sought after in dire circumstances.
If you choose this option, you will first have to get pre-bankruptcy credit counseling to determine whether you need to file for Chapter 7 or Chapter 13.
Both types of bankruptcy will fully discharge your debts once the process is completed.
In some cases, your lender may be willing to negotiate your repayment terms. Some lenders might offer you an extended repayment plan that could break your loan up into smaller payments.
You cannot simply stop paying a debt to which you have committed, without facing legal consequences. The lender could pass your debt to a collections agency or sue you and demand wage garnishment.
However, you can stop electronic debits from your bank account if you want to change your payment method in one of the following ways:
The federal government does not provide payday loan relief. However, the Federal Trade Commission (FTC) could take legal action against payday lenders that employ illegal lending tactics.