Eliminating Payday Loan Debt
Payday loans can seem like a convenient option when you’re short on money to pay off bills or afford expenses. However, while these loans are convenient, they’re also incredibly costly. Payday loans typically charge significantly higher interest than credit cards or other types of loans. For instance, in Ontario, you can be charged up to $15 for every $100 that you borrow. While this may not seem like much, know that this means you’re 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 a credit card and as a payday loan, you’d pay significantly more interest on the payday loan.
While payday loans are typically considered to be short-term loans, the reality is that they often result in long-term debt trouble.
Consider a situation where a person is living paycheque-to-paycheque with no emergency savings. If an unexpected expense comes up and this person borrows $200 (for example) from a payday lender, they’ll be expected to repay this loan in two weeks. Since they’re 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 another loan to repay the original loan. Even if they can pay the loan back, they’ll likely need to take out another loan in the near future to make up for the shortfall caused by paying back the 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.
The result is significant debt trouble.
How to Get Out of Payday Loan Debt
As mentioned, due to the high interest rates charged on payday loans, it can be very difficult to get out of payday loan debt. Here are some tips that could help.
- Contact the lender
- In some cases, it may be beneficial for you to contact the lender and explain your situation. Let them know how much you are able to pay and under what timeframe. They might 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 do this.
- Take out a less expensive loan
- Nearly every 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 loan to repay your payday loan.
- If you are not able to get another loan (due to having bad 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 your relationship.
- Consider debt consolidation
- Debt consolidation is a situation where you take out a new loan with a lower interest rate than the overall interest rate 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 paying a high amount of 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.
- Get professional help
- If you are struggling to repay your payday loan debt, and the options above have not helped you, you may wish to speak with a professional. A Licensed Insolvency Trustee can review your situation and provide you with information on the debt relief options that could be available to you.
Avoiding Payday Loan Debt
Since payday loans are incredibly tough to pay back, one of the best strategies is to avoid being in a situation where you need to get one. The way to do this is by having a budget and sticking to it. Add up how much you spend in a month and then make sure you can afford all these costs on your current income. If you’re not able to, make some cuts to various expenses.
It’s important to put some money aside for emergencies. A major reason that many people get into debt trouble is because they have no emergency fund. Life is unpredictable and you never know what will happen. Even if you can only put a small amount aside each month, this is better than nothing and it will help you cope when an unexpected expense comes up, so that you won’t need to take out a payday loan.