How to escape payday loan debt trap?

Payday loans are high-interest unsecured loans that are taken out by individuals without collateral or good credit that are necessary for taking out a normal loan. People only need to have an active job and a bank account to avail of a payday loan.

As per the Consumer Financial Protection Bureau, over 59 percent of borrowers roll over payday loans several times, fall into the payday loan trap, and eventually have to pay more in charges and fees as compared to the original loan sum.

payday loan trap

Some aspects of payday loans are:

  • The fees for payday loans are steep, often amounting to $55 every two weeks.
  • Even though payday loans are propagated as short-term loans, they are not so as most borrowers remain in payday loan debt for almost 6 months.
  • Most borrowers take out payday loans for wrong reasons like gas, groceries, rent, and other everyday expenditures instead for emergency purposes.

Borrowers generally need to repay an average of over $400 on their next paycheck after taking out a payday loan. This sum often is a large percentage of the income and hence most borrowers renew and extend the payday loan. This becomes a vicious cycles and a payday loan debt trap.

Payday loan default is accompanied by higher penalties and fees and even legal action. As the repayments are directly taken out by payday loan lenders from the bank accounts of borrowers, it is possible that borrowers may be changed overdraft fees by the bank in addition to penalties, fees, etc., by the payday loan lender. Also, zero money in the bank may prevent you from buying the daily essentials like food, utilities, etc. There will also be threats and incessant calls from collection agencies.

Despite the above aspects of payday loans, borrowers can follow the below listed options to escape payday loan debt trap:

  • Take loan from family or other sources to repay the payday loan in full.
  • Contact the lender and set up an extended payment plan (EPP). This option offers more days to repay the loan without any added fees. It is important to sign a new EPP contract and apply before the due date for EPP to be valid.
  • File a complaint with the Consumer Financial Protection Bureau or state regulators if lenders do not agree to an EPP.
  • Contact state regulators if the lender does not agree to an EPP. The regulators can initiate legal proceedings against unlicensed payday loan lenders and/or negotiate an EPP with licensed lenders.
  • Contact a debt management company for a debt management plan (DMP). The company will negotiate with the lender about a monthly repayment plan that works for the borrower.
  • Seek the services of reputed credit counseling agencies. They can assist in budget making, repayment plan for payday loans, negotiations for settlement of payday loan, and money management, etc.
  • Contact for-profit companies for a debt settlement program.
  • In case the payday loan debt is out-of-control, then the last option is to file for bankruptcy.