When strapped for cash, you might use a payday loan to help bridge the gap. Payday loans are short-term, high-cost loans typically due on your next payday. Most of these loans are for $500 or less, but you can find higher amounts.
Payday loans are relatively easy to get, requiring no credit check or financial review. But in exchange for convenience, you pay an extremely high borrowing cost with annual percentage rates (APRs) of nearly 400%.¹
Here’s everything you need to know about how payday loans work and how to get out of payday loan debt.
The payday loan debt trap explained
The payday loan trap is a cycle of debt many borrowers find themselves in after repeatedly borrowing money to pay off their debt.
It works like this: you take out a payday loan because you’re short on cash. When your next paycheck comes, you have to pay all of your regular bills and repay the payday loan and its high fees.
Since it’s only been a few weeks, you likely don’t have the money to pay your loan. So, what do you do?
One option is to roll over your loan for another pay period. You take on a new loan to pay off the first one, plus additional fees.
If you have to roll over your loan multiple times, there’s a good chance you’ll pay more in fees than the original loan amount.²
If you don’t take any action and default on your loan, the payday lender can send your debt to collections. Not only is this a stressful situation, but it’s also bad news for your credit score and, in some cases, can result in legal action.
7 tips for how to get out of payday loan debt
If you’re stuck in a cycle of debt and wondering how to get rid of payday loans, you’re not alone. Data from the CFPB finds more than 80% of payday loans are reborrowed.³
While it’s not easy to escape this cycle, there are things you can do to consolidate payday loans and get out of debt, including:
- Arrange a repayment plan. Depending on where you live, your payday lender might legally have to give you more time to repay your loan, without charging additional fees. For instance, Washington requires a minimum repayment term of 90 days.⁴
- Contact a nonprofit credit counselor. Credit counselors provide low-cost or free professional financial advice. A counselor can give you tips for how to get out of debt, can help you create a budget, or set up a debt management plan.
- Seek financial aid. Look to see if there are any community organizations, churches, or other outreach programs available in your area to provide support for housing, utilities, food, or transportation. You can also explore federal programs for assistance with food, housing, or your phone bill.
- Use a payday loan alternative. Some credit unions offer small-dollar payday loan alternatives (PALs). Loan amounts range from $200 to $1,000 with terms of one to six months.⁵ To access these loans, you have to become a member of a credit union for at least one month.
- Borrow from family or friends. It may feel awkward to ask a family member or friend for money, but it can help you from entering the payday loan debt cycle. To protect your relationship with your loved one, agree on how much you want to borrow, when you’ll pay the money back, and if you’ll pay interest. Put it all in writing to prevent miscommunication.
- Find ways to earn extra cash. Consider taking on a few extra shifts at work or finding a temporary side hustle to bring in more money to help pay off your loan.
- Avoid payday loans in the future. Once you’ve broken out of the payday loan trap, make it your mission to stay out. If you’re still struggling financially, look for ways to bring in more money while cutting what you can from your budget. If you don’t have a budget, you can speak to a credit counselor or try out an online budgeting app.
How will you get rid of payday loans?
Payday loans offer an easy and convenient way to borrow money. Unfortunately, high borrowing costs make it easy to get trapped in a loan you can’t afford.
To break out of the payday loan cycle seek financial advice and assistance to get back on your feet, then stick to a budget and avoid taking on another payday loan.
If you’re struggling to access money but want to avoid a payday loan, check out our tips on how to get a loan with no credit.