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Payday loans are advertised as a way for people with bad credit to get some quick cash in a pinch. They’re small loans, but they come with astronomical fees and interest rates if you can’t pay them back on time.
Trust us, one of the worst financial decisions you can make is to take out a short-term loan like this. Payday loans usually range from $100 to $1,000 and have interest rates of 400% or more!(1) But sadly, that doesn’t stop some Americans from falling victim to these scams.
Why do people take out payday loans?
When people can’t pay for their necessities, they can become scared and make rash decisions. Sometimes this lands them in the office of a payday loan shark because they think it’s the only option left.
Unfortunately, many people who borrow these kinds of short-term loans get stuck in the debt cycle. And it’s not even big “emergency” purchases that are keeping them there. A report by Pew Charitable Trusts found that 7 in 10 borrowers use payday loans for everyday, reoccurring expenses like rent and utilities.(2)
And if that’s not enough to make your head spin, 12 million Americans take out payday loans each year, and those who borrow pay an average of $520 in fees on an average loan of $375.(3) That’s nuts!
More than 5 million have beaten debt this way. You can too!
How do payday loans work?
If you apply for one of these awful predatory loans, the lender will check to see if you’re employed and have an income. You give them a signed check for the amount of the loan plus a fee—usually $15–30 for every $100 you borrow.(4)
The lender keeps the check until an agreed-upon date, which is most likely your next payday. When that day rolls around, you can either allow them to deposit the check or (if you’re still short on funds) you pay the fee and roll the loan over until your next payday.(5) And of course, the interest just keeps growing the whole time!
When your next payday hits, chances are money is still tight—but now you have a new problem. You owe much more than the amount of the original loan! You’ll have no choice but to take out another loan to cover your bills that month, so the cycle continues.
It’s no wonder many payday loan offices are located in low-income areas. They prey on people who are already struggling financially, hoping to keep them trapped in the process of having to take out more loans and paying massive fees.
What happens when you’re late or don’t pay back your payday loan?
Here’s a reality check: When it comes down to it, being late on a bill is better than resorting to a payday loan to pay it on time. A late fee from your utility company is nothing compared to getting involved with a greedy payday lender.
Payday lenders are aggressive about collecting the money you owe them. If you’re low on funds and your check doesn’t clear, they’ll try withdrawing smaller amounts directly from your bank account. (Because in order to get a short-term loan like this, you have to give them access to your bank account.(6))
As if that wasn’t enough, you’ll likely be hit with overdraft fees from your bank too!
At the same time, they’ll start calling and sending you letters to collect the loan. They’re not above contacting your family and friends, either. If you don’t answer the phone, they might even show up at your home or workplace looking for you. They’re ruthless!
Here’s one more thing to think about: Since payday lenders know their borrowers are broke, many will send a loan to collections shortly after the first missed payment. Avoiding it won’t help the payday loan go away—you’ll still have to pay the debt or even risk getting sued.
That’s the most extreme outcome, but it still happens—even for small debts. They’ll take you to court and garnish your wages or put a lien on your property to get what they’re owed. Don’t fall for the payday loan trap—it’s just not worth it!
So, how do you get out of a payday loan?
Stop. Borrowing. Money.
Make the decision that you will never, under any circumstances, borrow this kind of short-term loan again. Once you’ve gotten that out of the way, you can start getting serious about paying back the debt you owe.
Start with the smallest payday loan and knock it out as quickly as you can. Then pay off the next smallest one and the next until you’re in the clear. If you’re juggling other debts and unsure where to start, check out the debt snowball method.
What are better alternatives to payday loans?
First things first: you need to put a buffer between you and life. We call this your starter emergency fund. Try to save up $1,000 so you won’t be stuck taking out payday loans for little expenses in the future.
Finding $1,000 might sound impossible to you right now—but it’s doable! If you need a couple hundred dollars in a hurry, you can make that by selling items around the house.
Look around for anything of value you can part with. Try selling electronics, furniture, DVDs, clothes you or your children have outgrown or don’t wear—anything that will get some cash in your hand!
Are you good at odd jobs? Offer your expertise so you can bring in the extra cash you need to pay the bills. Mow lawns, do repair work, or even walk your neighbor’s dog!
Also, look at cutting back on areas in your budget so you can save money in a hurry. Cut the cable. Say “see ya later” to subscription services like magazines, monthly beauty boxes, or yes, even Netflix. Just shifting around a couple of things can free up extra cash pretty quickly.
If that doesn’t do the trick, you might need to take on a second job to get your family to a more stable financial place. Consider picking up night and weekend shifts of a part-time job or getting a work-from-home job. Remember, this is only temporary until you get yourself back on track.
Get out of the payday loan trap!
The most important step in fixing your mess is deciding right now that you won’t take out another payday loan. Ever. Don’t do it! It’s a game you’ll never win.
When you consider debt as an “easy money” option, the thought will linger in the back of your mind the next time money is tight. This idea of “robbing Peter to pay Paul” (borrowing money to pay off your other debts) isn’t sustainable.
A healthy financial plan starts with changing your behavior. If you’ll take the first step and commit to avoiding debt, you can go anywhere you want. You can do this!
If you’re serious about taking control of your money, check out Dave Ramsey’s 7 Baby Steps—the proven, step-by-step plan that shows you how to get out of debt for good and be confident in your financial decisions.