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If you find yourself stuck in the payday loan trap, it's important to know that you have options. You can start by signing up for an extended payment plan through your payday lender, if possible. Or you can pay off your loan with lower-interest choices like a debt consolidation loan, payday alternative loan or peer-to-peer loan.
Make it a priority to end the cycle of debt so that payday loans and their sky-high interest rates and fees no longer dominate your financial life. Here's how to break free.
How Can I Get Out of Payday Loan Debt?
If you're currently dealing with payday loan debt that's difficult to manage or overwhelming your budget, you can use the following strategies to get out of it.
Some of these options include taking out a different loan to pay off the original loan. While that's not a typical debt repayment strategy, payday loans are such a thorny problem that it may require thinking outside the box to get rid of them. Here's how to do it.
Extended Payment Plans (EPPs)
Many states require payday lenders to offer extended payment plans, or EPPs, to borrowers who can't pay back their debt. EPPs let you repay your loan over a longer period of time in smaller payments so you can get ahead of it and bring the outstanding debt to zero.
It's not a guarantee that you'll have access to an EPP, since their availability depends on your state's regulations and each lender's policies. Payday lenders who belong to the Community Financial Services Association of America (CFSA) trade association pledge to offer EPPs to any borrower having trouble with repayment. Other payday lenders, however, may not provide this option.
Debt Consolidation Loans
While it's best to avoid payday loans in the first place, a solid solution once you've already taken on the debt is to seek a debt consolidation loan. You'll take out this type of personal loan at a relatively low interest rate and use it to repay your payday loan in full, along with other high-interest debt you may have, such as credit card balances.
You must still repay the personal loan, but the strategy is to arrange predictable, non-escalating monthly payments that fit in your budget. Personal loans do require a credit check, but they are available to borrowers with no credit or bad credit. Even if you only qualify for a personal loan with a relatively high interest rate, it may not be as high as the effective annual percentage rate (APR) of your payday loan.
Learn more: How to Get a Debt Consolidation Loan
Payday Alternative Loans (PALs)
Devised by federal credit unions, payday alternative loans (PALs) are small loans that meet the needs of payday loan borrowers, but with more reasonable costs and repayment terms. They don't require a credit check, and while they're designed to be used instead of payday loans, you can use one to pay off a payday loan, as well.
The maximum APR is 28%, far less than a typical payday loan. You can repay the loan in equal monthly installments over a term that depends on the loan size and type.
The first type, referred to as a PAL I, are available in amounts of $200 to $1,000 and have repayment terms of one to six months. You must be a member of the credit union for at least 30 days to qualify. A PAL II is available in amounts of up to $2,000 over a term of one to 12 months, and you can apply right away after gaining credit union membership.
Peer-to-Peer Loans
While not as prevalent as they once were, peer-to-peer (P2P) lending platforms work for borrowers who may not qualify for a personal loan elsewhere by connecting them directly with investors. P2P loans operate similarly to standard personal loans, with comparable fees, and you can use one to pay off payday loans with excessive APRs.
They're potentially easier to qualify for than a personal loan at a bank or credit union, and borrowers with good credit could get lower interest rates than they would at traditional financial institutions.
For those with poor or limited credit, though—which may be the case for you if you're in payday loan debt—interest rates on P2P loans could be higher than for personal loans available through other lenders. It's best to compare rates across a range of loan types, including PALs from credit unions, to make sure you're getting the best deal.
Learn more: What's a Good Interest Rate on a Personal Loan?
Debt Management Plans
If all other options fail and you find yourself unable to pay off a payday loan, consider pursuing a debt management plan (DMP). Under a DMP, you work with a certified credit counselor, who helps you come up with a budget and consolidates your debts into one monthly payment. The counselor also negotiates with your creditors to potentially get you lower rates or reduced fees.
Payday loan debt is not always an eligible form of debt for a DMP, so check with the credit counseling agency to make sure it's possible to include these loans in the plan first.
Participation in a DMP requires paying setup and monthly fees, and may entail closing all your credit card accounts if you want to use it to pay off credit card debt too. That limits your access to credit and could also lead to higher credit utilization across your credit cards, which can have a negative impact on your credit scores.
Since it's a big step to take part in a DMP, make sure the potential benefits justify the drawbacks.
Learn more: How to Create a Debt Management Plan
Why Do People Fall Into the Payday Loan Trap?
Payday loan debt is uniquely hard to get rid of because of the widespread practice of loan renewals or rollovers, which can suck borrowers into a costly cycle of loan extensions.
Repayment of a payday loan is typically required two to four weeks after disbursement. But some lenders let you renew a payday loan for a fee so that you can extend the repayment date to your next payday. The problem is that payday loan fees are already high, with a typical finance charge of $15 for every $100 borrowed.
Adding another fee without paying down the principal balance can mean an increase in debt that's harder to get rid of, and the possibility that you'll need to simply continue renewing the loan. You'll also end up paying an effective APR that extends into the triple digits.
Some states don't allow payday lenders to offer rollovers, or they limit the number of rollovers a borrower can do. To learn more about your state's regulations, contact its bank regulator or attorney general.
What to Do After Getting Out of Payday Loan Debt
Once you've done the hard work of eliminating payday loan debt, it's key to understand how the cycle started and to take steps to avoid it happening again.
- Analyze your budget. The core concern that led you to take out a payday loan was, most likely, that your earnings couldn't cover your necessary expenses. Now that you're on the other side of the debt cycle, fortify your finances by increasing your income or reducing expenses. Try making a budget so you have a game plan for how to spend your earnings each month. A low-effort budget is best if you're making a spending plan for the first time.
- Prioritize building an emergency fund. The best way to avoid having to take out a small loan in the future is to start an emergency fund, which is cash set aside for unplanned expenses. You can start small, with just $20 or $50 saved, and boost the fund slowly by setting up automatic transfers from your checking account each month.
- Focus on your credit. If you turned to payday loans because you didn't have sufficient credit for a traditional personal loan or credit card, focus your attention on improving your credit score. That can include putting all bills on autopay so you never miss a payment, regularly checking your credit scores and applying for a secured credit card or credit-builder loan to build positive payment history.
Learn more: What Is a Debt Spiral and How Do I Get Out?
Frequently Asked Questions
How Do Payday Loans Affect Your Credit?
Applying for a payday loan doesn't require a credit check, and payments aren't reported to the credit bureaus. But if you don't pay back the loan, it could go to collections and result in a severe, negative impact to your credit scores.
What Happens if I Default on My Payday Loan?
If you default on a payday loan, you'll pay high fees and interest charges and your debt could go to collections, which can hurt your credit. The lender or collection agency could also sue you to collect the debt, which may result in a court order allowing the lender or debt collector to garnish your wages or bank account.
Are Payday Loans Ever a Good Idea?
A traditional payday loan is almost never a good idea. There are plenty more consumer-friendly alternatives on the market with lower interest rates that limit the possibility of entering a cycle of debt.
What Are Some Alternatives to Payday Loans?
Instead of a traditional payday loan, try a payday alternative loan (PAL) from a credit union, a personal loan for those with bad credit or borrowing from family or friends instead. It's particularly worthwhile to consider getting a small loan from a credit union if you have credit challenges, since credit unions are not-for-profit institutions that often provide special programs for members with limited or poor credit.
The Bottom Line
When you're seeking a way out of payday loan debt, you've already taken a crucial first step: recognizing payday loans are a problem worth solving. That means you're well-positioned to find a way to pay them off for good, and then prioritize your financial security with an emergency fund and improved credit. Strengthening your savings and credit will give you a wider range of low-interest, consumer-friendly borrowing options in the future.