How To Get Out Of Payday Loan Trouble
Most people are familiar with the term “payday loan” but may not be entirely sure how they work. A payday loan is a type of short-term borrowing where you typically borrow against your next paycheck. We first recommend reading our article on the 10 ways to pay off debt fast, and then come back here!
So, if you need cash now and don’t get paid until next week, a payday loan is an option many turn to. While payday loans can provide quick access to cash in a pinch, there are significant dangers associated with them.
For one thing, they often come with high-interest rates and fees which can make it difficult to pay them back. Often times at rates of 10% per month or higher.
Additionally, if you’re not careful about taking out multiple loans or rolling them over into new ones, you could end up in payday loan trouble, or what we refer to as the Payday Loan Cycle; more commonly put ‘Robbing Peter to pay Paul’.
This is when the amount you owe starts to spiral out of control and you need to take out additional payday loans to service the existing ones. If you’re facing financial difficulties or are simply looking for alternatives to taking out a payday loan, there are several options available to consider.
These include things like talking to your bank about consolidation options or seeking professional debt advice from a Licensed Insolvency Trustee.
What Are Payday Loans?
When you’re in need of cash and have few options, a payday loan might seem like the best choice.
But what is a payday loan?
How does it work?
And are there any risks involved?
A payday loan is a type of short-term borrowing where a lender will extend high-interest credit based on a borrower’s income and credit profile. Payday loans are typically due within 14 days, or by the borrower’s next paycheck.
The main appeal of payday loans is that they are quick and easy to access – most lenders can approve your loan within minutes, and you could have the cash in your account as soon as the same day.
However, this convenience comes at a price:
According to the Financial Consumer Agency of Canada, the cost of payday loans can be as high as 500-600%. If you are unable to pay the loan off this means that for every $100 in payday loans you are unable to pay off completely can cost you upwards of $500 to $600.
In other words: Unless you’re absolutely certain that you’ll be able to repay the full amount (plus interest) within those two weeks, taking out a payday loan probably isn’t worth it or the right solution.
Key Takeaway: Payday loans, and especially online payday loans, are a quick and easy way to get cash, but they come with high-interest rates which can make them difficult to repay.
The Dangers of Taking Out a Payday Loan
When you’re in a tight spot and need cash fast, it can be tempting to take out a payday loan. But before you do, it’s important to understand the dangers of these loans.
The biggest danger with payday loans is the high-interest rates and fees associated with them. Payday loans typically have much higher interest rates than traditional loans from banks or credit unions.
This means that if you can’t pay back the loan when it’s due, you’ll end up paying even more in interest and fees over time. And as described at the beginning of this article, another big danger is getting caught in a cycle of debt by taking out multiple payday loans one after another.
This happens because each new loan pays off the previous one – but then leaves you owing money on the next one immediately afterwards.
Before long, this cycle can become very difficult to break free from without help from a debt counsellor.
So, if you’re considering taking out a payday loan, be sure to understand the risks involved first.
Paying back the loan on time is essential to avoid getting caught in a cycle of debt – but even then, you may end up paying more in interest and fees than you originally borrowed.
Key Takeaway: Be aware of the dangers of payday loans, including high interest rates and fees, and the cycle of debt they can create.
Alternatives to Taking Out additional Payday Loans
But before you do, it’s important to know that there are alternatives.
Here are a few:
1. Negotiate With Your Creditors For More Time To Pay.
If you’re behind on other bills, which are causing you to consider additional payday loans, reach out to your creditors and explain your situation. Most are willing to work with you by giving you more time or extending your payment plan.
2. Try And Get A Personal Loan From Your Bank
If you have good credit, this may be an option for you.
3. Seek Help From A Qualified Debt Professional Such As A Licensed Insolvency Trustee
Licensed Insolvency Trustees are highly qualified debt professionals who can help you understand all of your options including filing a consumer proposal or bankruptcy.
Key Takeaway: Before taking out another payday loan, explore all other options such as speaking with a Licensed Insolvency Trustee
Tips for Avoiding “Payday Loan Trouble
When it comes to personal finances, one of the worst traps you can fall into is taking out a payday loan. These loans are typically short-term, high-interest loans that can quickly spiral out of control if they’re not paid back on time.
If you’re considering taking out a payday loan, here are a few tips to help avoid trouble:
1. Don’t Take Out a Payday Loan Unless You’re Absolutely Sure You Can Repay It on Time.
It is very easy to underestimate the true costs of a payday loan. Paying $20 for a $300 loan may not seem like a lot, however, if you are in need of urgent cash then there is a much higher likelihood that you will have difficulty paying this back. Each payday lender is different, but they can be incredibly aggressive collectors in the event you are unable to pay them back in time.
2. Make a Budget and Stick to It.
One of the main reasons people end up in trouble with payday loans is because of unexpected expenses. Making a budget can help plan for some of these expenses ahead of time and help you save money
Start an emergency fund as soon as possible
An emergency fund goes a long way in helping people avoid payday loans. Even saving $5-10 a pay will eventually grow into a decent sum of money that can be used in the event of emergencies.
3. If You Do Take Out A Payday Loan…
If despite your best efforts, you find yourself needing to take out a payday loan, make sure to shop around for the best terms and conditions. All payday loans are not created equal, so it’s important to compare options before agreeing to pay back any money.
By following these tips, you can avoid the pitfalls of payday loans and keep your finances on track.
Key Takeaway: Payday loans can be dangerous if you can’t repay them on time. Make sure you understand the terms of the loan and only borrow what you can afford to pay back.
FAQs in Relation to Payday Loan Trouble
What are the consequences of not paying a payday loan?
The consequences of not paying a payday loan can be very severe. If you don’t pay back the loan, the lender can take legal action against you.
This could lead to wage garnishment and asset seizures. In addition, not paying your payday loan will damage your credit score which could make it difficult for you to get approved for future loans or lines of credit.
How do you get out of a payday loan nightmare?
There are a few ways to get out of a payday loan nightmare. You can try to negotiate with your lender, create a budget and stick to it, or you can use an alternative financial service.
If you want to negotiate with your lender, you should first contact them and explain your situation. See if they are willing to work with you on repayment terms.
Creating a budget is another way to get out of payday loan trouble.
Determine how much money you have coming in each month and make sure that your expenses do not exceed this amount.
Make all necessary cuts so that you have enough money left over each month to repay your loans without incurring additional fees or interest charges.
If you need more money than what you have coming in each month, consider using an alternative financial service. There are many options available, such as consumer proposals and bankruptcy.
Do your research to find the best option for your situation and make sure that you can commit to following their repayment plan before signing up.
Why Are payday loans a problem?
Traditional payday loans and newer online payday loans are a problem because they often trap people in a cycle of debt.
The high-interest rates and fees associated with payday loans can make it difficult for borrowers to repay the loan, which can lead to default and further financial difficulties.
What is the biggest problem with payday lenders?
The biggest problem with payday lenders is that they often trap borrowers in a cycle of debt. This is because the loans are typically structured in such a way that the borrower must take out another loan to pay off the original loan, plus interest and fees.
This can lead to borrowers owing more money than they can afford to repay, which can be very difficult (if not impossible) to get out of without third-party intervention.
If you’re facing financial difficulties and want help getting rid of payday loans the best thing to do is seek professional advice from a Licensed Insolvency Trustee. These debt professionals can help you develop a plan to get out of debt. Powell Associates Ltd is pleased to offer a free consultation to help you understand all of the debt solutions that are available for your specific situation. Let us help you with your debt.
This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.