How to Escape the Payday Loan Debt Trap

According to a 2016 Pew Research study, most borrowers who incur payday loan debt end up paying a lot in fees. In fact, most pay more in fees than they borrowed. Pew Research also notes that more than half of payday loan borrowers already struggle to meet monthly obligations. When you have an emergency you can’t otherwise fund, it can be tempting to use a payday loan “just this once.” But more often than not “just once” turns into “over and over again.”

If you’ve fallen into the payday loan trap, we’ve got some tips for escaping and avoiding the negatives of dealing with payday loan organizations.

Which Payday Loan Is Best?

There’s really no such thing as a good payday loan, which means there’s really no such thing as the “best” payday loan.

Payday loan organizations are considered predatory lenders for good reasons. In fact, some states have outright banned them. Pew Research calculates that the average borrower spends an average of $520 in fees on a loan of $375. The average annual interest rate of payday loans to net out to a whopping 391%. That’s about 10 times more than you’ll pay on any credit card or personal loan you qualify for.

How to Get Out of Payday Loans

Before you take out a payday loan, educate yourself about what a payday loan really is. Often, people stay trapped in this process because they don’t understand how it works and how much it costs. If you’ve already fallen into the payday loan trap, don’t despair. We have some tips to make it out and work your way toward financial independence.

Seek Alternatives to Payday Loans

Before you get another payday loan to pay off the fees of your previous payday loan, look into alternatives to payday loans. If you can use one of them to pay off the existing payday loan, get out of the trap and don’t go back.

The Earnin app, which lets you get an advance of up to $100 per day on your paycheck without the fees and trap associated with payday loans. You can use this advance to pay off your payday loan and avoid the fees that have kept you trapped. Some limitations apply.
Personal loans, which let you borrow a larger amount at a fixed monthly payment. This may be a better way to get ahead with your money matters while also agreeing to a realistic payment that you can afford over a few years.
Debt consolidation loans, which let you take a loan to cover your payday loan debt as well as other debt you might owe. The result is one account and payment you need to manage, and it’s almost always at a lower interest rate than your payday loan. Consolidation loans can stretch what you owe into payments over a year or more, making it easier to budget for the debt.
OppLoans, a popular alternative to payday loans and personal loans. They don’t look at your credit score like most personal loan options, approve you quickly and lend you more than payday loans without the super-high fees. Be aware though, their fees are higher than traditional bank personal loans.
Credit cards can be an option if you already have one. They have lower interest rates than payday loans so they can be easier to pay off. If you already have credit card debt, you could consider a balance transfer credit card, which allows you to transfer the balance of another credit card with no interest for a certain amount of time.

Ask for an Extended Payment Plan

If you’re currently caught with a payday loan you can’t pay back on time, find out if your state requires payday lenders to work with consumers on extended payment plans. These plans let you make payments over time on the loan instead of taking out another expensive payday loan you may not be able to pay in two weeks.

The National Conference of State Legislatures provides a breakdown of state laws governing payday lenders. You can refer to this resource to find out if an extended payment plan is an option for you.

Engage in Debt Management Planning Processes

If you’re not sure what to do and you’re dealing with much more than a single payday loan gone wrong, consider debt management planning. This lets you engage with a professional organization that works with you and your creditors. Debt counselors help you create a working budget and catch up on financial matters so you no longer need payday loan organizations.

How to Stop Paying Payday Loans Legally

Unfortunately, you can’t just stop paying your payday loans. These are legal debts, which means the payday lender can report negative items on your credit report, send you to collections or even sue you.

Many payday lenders also make you sign an agreement that the payments will draft out of your bank account. If you don’t make a payment, they take the money anyway. That can leave you on the hook for even more expenses, such as overdraft and NSF charges.

If you’ve exhausted your other options, there are a few ways to move forward from a legal perspective.

File for Bankruptcy

If you simply can’t make your payments at all, you may be able to stop paying payday loans legally via bankruptcy processes. When you file a petition of bankruptcy, an automatic stay goes into place. That means any creditor you listed on the bankruptcy must cease collections activities.

Depending on whether you file a Chapter 7 or a Chapter 13 bankruptcy, you may need to make payments on your debt through the trustee. In a Chapter 13 bankruptcy, the trustee pays priority debts such as mortgages, auto loans and taxes first. They then make some payments on nonpriority debts, such as credit cards or payday loans.

The payday lender may or may not receive money if you file bankruptcy. But once your bankruptcy has been finalized, you no longer owe the payday loan organization any money.

Bankruptcy is a last resort, though. If you’re not to that point yet, consider a few other options first.

Contact State Regulators

While state regulators can’t necessarily help you stop paying your payday loans, they could be a good next step if you can’t get the lender to work with you any other way. If payday lenders refuse to work with you on an extended payment plan for your debt, contacting the agency that regulates lenders in your specific state could be helpful.

You can use the National Conference of State Legislatures list of state laws to determine if the payday lender has broken any laws in its dealings with you. State regulators may be able to help negotiate a payment plan with licensed lenders of payday loans. They may also take action against unlicensed lenders of payday loans.

File a Complaint

Filing a formal complaint against the payday lending company if it refuses to work with you on a payment plan creates an official record of the situation. Complaints can be filed with state regulators as well as on a national level with the Consumer Financial Protection Bureau. Depending on the severity of your complaint, you may not be required to pay.

Turn to Better Options

Payday loan organizations offer lending that can be classified as “desperate measures.” Before you take out one of these loans—and before you consider drastic measures such as bankruptcy—make sure you’ve considered all the options listed above.