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Digging Yourself Out Of A Payday Loan Hole

Eliminating Payday Loan Debt

We’ve all seen movies where the main character starts digging a hole and then, after many hours of exhausting labour, he looks up and realizes he is trapped, unable to climb out due to the depth of the hole and its steep sides. That is what having a payday loan can seem like. Just like being in a deep hole with no way out.

Payday loans often seem like a convenient solution when you are short on money to pay off bills or afford larger expenses, such as a car repair. However, while these loans are convenient, they are also incredibly costly. Payday loans typically charge significantly higher rates of interest than credit cards or other types of loans.

For instance, in Ontario, you can be charged $15 for every $100 that you borrow. While this may not seem like much at first glance, know that this means you are paying 15% interest on a two-week loan. A credit card, on the other hand, may charge 20% interest annually. If you were to borrow the same amount of money on your credit card and from a payday loan company, you will quickly discover the debt hit from the payday loan is significantly more interest than what you have taken on with the credit card debt.

The other error many of us make with payday loans is when we consider them to be short-term. Nothing can be further from the truth as they often result in long-term debt stress.

Let us consider a situation where a person is living paycheque-to-paycheque with no emergency savings put aside. If an unexpected expense comes up and this person borrows $200 (for example) from a payday lender, they will be expected to repay the loan in two weeks. Since they are paycheque-to-paycheque and have no savings, the chances of them being able to pay back the loan on time are slim.

What typically happens is that the person will need to take out a second loan to repay the first one. Even if they can pay the loan back, they will likely need to take out another loan shortly thereafter to make up for the shortfall caused by paying back the first debt. While, legally, an individual is not allowed to take out another payday loan from the same lender before paying the first loan in full, they can always go to another lender if they need to.

Many of our clients have ten or fifteen concurrent payday loans they are juggling. The result is significant debt trouble. And it can get scary.

How to Get Out of Payday Loan Debt

Due to the high interest rates charged on payday loans, it can be exceedingly difficult to dig yourself out of payday loan debt. Here are some tips that could help extend a ladder down into that payday loan hole for you:

  • Contact the lender
    • In some cases, it could be beneficial for you to contact the pay day lender and explain your situation. Let them know how much you can pay and within what timeframe. They may be willing to agree to a modified payment schedule, especially if they believe the only other option is that you will default on your loan. However, know that they have no obligation to help.
  • Take out a less expensive loan
    • Every other type of loan is less expensive than a payday loan. See if you can get a short-term loan from a bank or private lender, or a line of credit, and then use this new loan to repay off your payday loan.
    • If you are not able to get another loan (due to having poor credit or no credit), you may want to ask a family member for assistance. However, if you borrow money from a family member, make sure you have a definite plan to pay it back or you could seriously harm that relationship.
  • Consider debt consolidation
    • Debt consolidation is an arrangement where you take out a new loan with a lower interest rate than the overall interest payable on your existing debts. If you have a lot of high-interest debt, this could be an option for you.
    • However, note that you will still need to pay the full amount in this situation. Consolidating your debts does not reduce the overall amount you owe, but it could save you from continuing to paying payday loan-style interest.
    • Also know that if you have a poor credit score, it could be difficult for you to get a loan with a low enough interest rate to clear up your payday loans.
  • Get professional help
    • If you are struggling to repay your payday loan debt, and the options above are not accessible to you, consider speaking with one of our licensed professionals at Farber. A debt solutions manager or Trustee can review your situation and provide you with information on the debt relief options that are available to you.

Avoiding Payday Loan Debt

Since payday loans are incredibly tough to pay down, one of the best strategies is to avoid being in a situation where you need to arrange one. The best way to do this is by having a realistic budget and sticking as closely to it as possible. Add up how much you spend in a month and then make sure you can afford all these costs based on your current income. If you are not able to balance the budget, make some cuts to some of our variable expenses (such as fast food, groceries, etc.).

It is also extremely important to sock some money away for emergencies. A major reason many people get into debt trouble is due to not having an emergency fund. Life is unpredictable and you never know what stressors will be around the next corner. Even if you can only salt away a small amount each month, make sure you do it. A little is better than nothing and it will help you begin to build up a small emergency fund that could help you cope when an unexpected expense comes up and keep you out of the payday loan stores.

And if you want to talk about your payday loan pressures, or any other debt stressors you might have, please CLICK BELOW ON THE FREE CONSULTATION BUTTON to arrange to speak with one of our Farber team today. We are here to advise you on all your options.