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Avoid the payday loan high-interest trap with these debt alternatives

A person walks by a Payomatic Check Cashing and Pay-day Loans center in New York, September 16, 2020.
Andrew Kelly | Reuters

For the over 12 million Americans who take out payday loans every year, the debt doesn't end with their next paycheck. In fact, Consumer Finance Protection Bureau data shows that over 80% of payday loans are rolled over within 14 days and the majority of these subsequent loans are for amounts equal to or greater than the original. That's because these loans often charge sky-high interest rates, engulfing borrowers in a vicious cycle of interest payments and poverty. And if you don't pay them off, there can be serious financial consequences

There are options to escape predatory lenders, and get back control over your financial life. 

Payday loan alternatives  

Before taking out a payday loan, you should exhaust all available options, such as requesting an advance from your employer, borrowing money from friends or family, or selling unused items. But know that there are also other borrowing options with lower interest rates and fees that may be accessible to you.

Here a few loan options: 

Personal loans, such as those offered by your bank, credit union, or online lenders, are generally repaid over two to three years, with interest rates based on your credit history, but typically at 36% or less. The amount of a personal loan may vary, but can range from about $800-$30,0000. If used judiciously, a personal loan can build credit, and help you consolidate other, higher-interest debt, such as credit cards. On the other hand, if you're already in debt trouble, personal loans may add to your woes. Still, they're a better choice than payday loans, which can have interest rates as high as 400%. 

Payday alternative loans, which can be offered by credit unions to their clients, tend to have interest rates well under 20%, and offer a total loan amount generally under $800. 

Finally, if you have any remaining credit line available, it's preferable to use an existing credit card .Even with an interest rate of up to 36%, it's vastly preferable to a payday loan. 

How to deal with an existing payday loan

If you are already tied to a payday loan, understand the options available to you.

In many states, an extended payment plan may be available, allowing you to make lower monthly payments. However, this type of plan does not exist in all states, so ask your lender if this option exists in your area. Also, the extended payment plan can generally only be used once per year, meaning you should not expect to roll over loans and continue enjoying extended repayment. 

Second, if you have access to any of the loan alternatives listed above, you can consolidate your payday loan into a credit card, credit union loan, or personal loan for a lower interest rate.

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Third, try to negotiate a direct solution with your lender, and if this is not possible, you can file a complaint with the state regulator or the Consumer Financial Protection Bureau. Although lenders have no responsibility to respond to these, state regulators or the CFPB may be able to provide you with valuable information to negotiate your situation. 

You can also request to work with a debt management plan. These are credit counseling agencies who try to negotiate lower interest rates with your lenders, thus reducing the total amount of interest you pay. In turn, you send the credit counseling agency a single monthly payment which they in turn use to satisfy your debts. However, working with a debt management plan can require you to cease using credit cards while in the program, and may affect your credit. These agencies may also charge a monthly fee of around $25-$75, as well as plan set-up costs. However, the initial evaluation session is typically free, and worth pursuing, if only to better understand your options. 

Similarly, filing for bankruptcy can eliminate nearly all debt (with notable exceptions, such as student loans), but it will have long-term consequences for your credit. While bankruptcy is rarely pretty, it may offer a definitive exit for borrowers trapped in a never-ending cycle of high-interest debt and worsening financial options. 

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