Breaking Out of the Payday Loan Trap
For someone who has no credit history, savings or credit cards, acquiring emergency cash can be a major challenge. This kind of situation causes people to turn to short-term loan companies since these lenders do not require a borrower to verify that he or she is financially stable to provide him or her with emergency funds. Once the funds are borrowed, repaying the money frequently becomes a hardship, one that’s tough to overcome. Some people think that they owe too much to a payday loan company to get out of debt. This may seem especially true when every payment made covers only the fees that the lender charges and fails to pay any amount to the principal balance.
The best way to break out of the payday loan trap is for borrowers to pay more against the loan. They can do this by cutting spending as much as possible while continuing to pay for necessities like rent, insurance, medical care and utilities. Falling behind on essentials just creates a new crisis. Those who are in debt to payday loan lenders can sell assets, use tax refunds or take on a second job to earn extra funds to pay off a loan more quickly.
Applying for an Extended Payment Plan or EEP
According to Yahoo Finance, those who have a high balance payday loan may be eligible for an EEP. This kind of plan gives borrowers more time to pay back a loan without accruing additional fees or interest. It also prevents the account from being turned over to collections. Borrowers who enter into this type of arrangement have the responsibility of paying the loan on time.
To qualify for this option, the loan must be through a lender who is a part of the Consumer Financial Services Association of America or CFSA. Borrowers who need this type of payment plan must apply for it by the last business day before the due date of the loan. A signed agreement is also required.
How Do Payday Loans Work?
ToughNickel reports that payday loan lenders operate by requiring a borrower to issue a post-dated personal check to them for the amount that they’re borrowing in addition to any fees for the loan. This also works with a borrower’s checking account. In this case, the person in need of the funds would give his or her approval to the payday loan company to withdraw the balance of the loan on the due date. The lender would wait to cash the check or withdraw the funds until the day that the loan is due. If the borrower doesn’t have the funds to repay the loan, he or she can roll over the loan and extend the repayment time.
For Most Borrowers, Payday Loans Snowball
According to Pew Charitable Trusts, just 14 percent of those who take out a payday loan have the means to repay the full amount borrowed by the due date. In its report, the organization found that the average borrower could afford a $50 payment every two weeks. This is the amount that the typical payday lender charges to renew a loan.
The agency also found that 76 percent of payday loans are in a renewal status or are quick re-borrows. For payday lenders, the loss rate is just 3 percent. Loans generally pile up because consumers fall behind. Thomas Fox, Cambridge Credit Counseling’s community outreach director said, “We’ve seen people with five to seven payday loans from the original loan. It’s loans stacked on top of a loan.”
Taking Steps to Avoid Cash Shortages
Borrowers can avoid cash shortages by building up their savings accounts and by improving their credit scores. A low balance secured credit card is one of the best ways to increase a credit score. Borrowers send $500 to $1,000 to the credit card company. They can then make small purchases on the card and send regular payments toward the amount charged. With on time and regular payments, credit unions can see that a borrower is responsible and able to handle unsecured credit. When it comes to savings accounts, people can build them by putting a little money away each month. This helps individuals avoid the payday loan trap. To read more about the trouble with payday loans, visit the Personal Money Store.