How To Get Out of Payday Loans

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A payday loan might sound like a good idea when you need emergency cash. However, the debt can spiral out of control, forcing you to roll your balance into a new loan, extending the time to repay and adding to your total interest.

If that’s the situation you’re in right now, know that you have options, even with little or no money to spare and bad credit.

How Payday Loans Work and How They Keep You in Debt

A payday loan is a short-term loan used to borrow money quickly. You agree to repay the money, usually by automatic debit, when you get your next paycheck or benefit check.

Most payday loans are for small amounts. However, annual percentage rates can reach nearly 400%, according to the Consumer Financial Protection Bureau. Borrowers expect to pay much less interest because the loan is due in two to four weeks, on average, not in a year. But that’s often not how it works out.

What Happens If You Don’t Pay a Payday Loan?

If you can’t pay your loan off when it’s due, the lender will likely roll over your balance into a new loan. That’ll give you more time to pay, but it’ll also increase total interest payment. If your lender charges an origination fee to make the loan, you might have to pay that again, too.

What seems like a reasonable cost for a two-to-four-week loan turns out to be anything but when this process repeats month after month. If you go too long without paying, or with paying less than the amount due, you’ll face more serious consequences.

Important To Know

Some states regulate payday loans to protect consumers from predatory lending practices. Your state’s attorney general or financial regulation website is a good starting point to learn about your state’s payday lending laws.

Collections

Defaulting on your payday loan prompts the lender to try to collect on the debt. The first step is usually to call and write to you to ask for payment. If this fails, the lender might “charge off” your account and turn it over to a debt collector.

The collection company starts its own collection efforts and, if it bought your debt, reports the account to credit bureaus. The company continues calling and writing until the debt is paid or the company resorts to legal action.

Legal Action

The last step in the collections process is for the debt collector to turn the account over to an attorney. The attorney then files a lawsuit against you for the amount of the debt.

The lawsuit is a civil suit, not a criminal one, so it can’t land you in jail. But it could cost you hefty court and attorney fees on top of the the amount you owe. The judge can garnish your wages or freeze your assets or both, until the judgement is paid.

How To Pay Off Payday Loans With Little Money

You have options for paying off your payday loan even if you don’t have enough money to make the payments.

1. Figure out exactly how much money you do have.
2. Calculate your income and how much you’re spending on essentials, such as rent or mortgage, groceries, commuting to work, utilities, healthcare, minimum debt payments and other expenses you can’t cut out.

The amount of income that remains is disposable income available for spending on nonessentials. Cut back on nonessential spending to free up more money for your payday loan payments.

If it’s still not enough, consider one of these options.

Payment Plan

The lender — or collection agency, if the lender has charged off the loan — might let you make payments toward your overdue amount. This could be the least expensive option and the best one for your credit, if you can afford it.

Debt Consolidation Loan

This is a personal loan you take out to pay off all of your payday loans and other high-interest debt. You might have to pay an origination fee and a high interest rate. Most lenders require decent credit, and you’ll need sufficient income to make the payments.

Credit Counseling

Nonprofit credit counselors negotiate with your creditors to lower your interest rates, then work with you to create a debt management plan to pay off the loans. You make one payment each month to the credit counselor, and the credit counselor disburses the money to your creditors. You might have to pay fees to enroll and participate in credit counseling, and you won’t be allowed to use credit while you’re in the program.

Debt Settlement

This is an agreement to settle the debt for less than you owe. Settlement damages your credit, and you might have to report the forgiven amount as income on your tax return[5].

Bankruptcy

Bankruptcy eliminates your debt or reorganizes it to make it easier to repay. It also stops most collections activities. However, it’s a complicated legal process, so most bankruptcy filers hire attorneys to represent them despite the high cost. It’s also the most damaging solution for your credit.

The following table summarizes ways to pay off your payday loans if you have little money.

How To Avoid Payday Loans: 7 Alternatives

The best way to avoid getting in over your head with payday loans is to avoid them entirely. If you need some ways to help avoid payday loans in the future, try these:

1. Build an emergency fund in a high-interest savings account.
2. Take out a personal loan from your bank or your credit union.
3. Sign up for a cash advance app with no interest, such as FloatMe or Klover. Note that these and similar apps do charge fees.
4. Request a payroll advance, if your employer offers it.
5. Start a side hustle that lets you make money fast, such as lawn mowing or delivery or rideshare driving.
6. Sell belongings you don’t need.
7. Borrow from a family member.

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