How to Pay Back a Payday Loan
Payday loans seem convenient, but the reality is that they are very difficult to pay down and getting one can lead to serious financial troubles. The reason these loans are so potentially dangerous is that they have very high interest rates.
A payday loan is designed to be repaid within a short period of time (usually around two weeks). The issue is that, if someone doesn’t have money now, the likelihood of them having the money in a couple of weeks is quite slim. In most cases, a person who takes out a payday loan is either unable to pay it back on time. Even if they do pay it back, doing so damages their budget going forward, leaving them likely to take out a second payday loan later.
For instance, if you are living paycheque-to-paycheque, and a sudden unexpected expense comes up, you’ll be short on money. If you borrow $500 to make ends meet this month, and repay it next month, that leaves you $500 short next month. How do you make this up? In a lot of cases, people wind up going back to the payday lender (or a different payday lender) for another loan.
Taking out a payday loan can leave you in a vicious cycle. So how do you pay back the loan without hurting yourself financially? Here are some tips.
How You Can Pay Back your Payday Loans
As mentioned, interest rates on payday loans are very high. For instance, in Ontario, the maximum cost of borrowing a payday loan is $15 for every $100 that you borrow. This means, if you borrow $300 for two weeks, it will cost you $45. That doesn’t sound like much, but consider that most credit cards have an annual interest rate of around 20%.
For instance, the Ontario government states that, you used your credit card to borrow that $300 for two instead, and paid 23% interest, that $300 would cost you only $6.15 in two weeks. When you compare this to the $45 it will cost you to get a payday loan, you can see how much more expensive these loans are.
Therefore, the most important thing you can do when you have outstanding payday loans is to pay them back as quickly as possible. Look at your budget and see if there is anything you can cut so that you have the money to repay the loan. Ask your employer if you can work overtime. Sell some of your items online or through a garage sale to make some extra money. You should even consider asking friends or family members for help. All of these options are better than continuing to pay a large amount of interest.
If there is no way for you to earn, raise, or save the extra money to repay your payday loans, you may wish to consider taking out another loan and using this to pay down the payday loan. Most other loans (credit cards, lines of credit, personal loans, etc.) have lower interest rates than a payday loan, so you may be able to save yourself some money.
However, the rate of interest that you are able to get will depend on several factors, including how many other debts you have and the state of your credit report. If you have missed many debt payments in the past, or if you already have several outstanding loans, you may not be able to get a favourable interest rate, and thus you might not be able to save yourself any money by getting a consolidation loan.
In addition, taking out a new loan to repay your payday loan won’t reduce the overall amount that you owe, even if you are able to save some money on interest.
Help with Repaying Payday Loans
If you cannot get a new loan with a lower interest rate, or if you are not able to repay the amount that you owe even with a lower interest rate, it is a good idea to seek professional help. It may seem like there are no options when you are struggling with debt, but there is help available. For instance, a Licensed Insolvency Trustee can review your situation and provide you with details on the options that are available to you. Most trustees will conduct this initial consultation at no charge, so it won’t cost you anything to find out what you can do to help resolve your debt problem.