How to Break the Payday Loan Cycle
By Paul RizzoPayday Loan Writer
It happens all the time.
You, the consumer, think you are making a move that will help get a handle on your escalating debt. The next thing you know, you are in a damaging payday loan trap. It's hanging over your head. You want out. But what to do? Are there debt consolidation places that can help get you out of this cycle? What is the best course of action?
According to Bankrate.com advisor Steve Bucci, this is a cycle that can be very difficult to break — but it can and must be done.
If you are living paycheck to paycheck, as so many American families are, and are without savings or conventional credit, handling unexpected expenses can be a major problem. And payday loans can seem like a godsend at a time like this.
The main reason is that the money from the first loan is an advance against your next paycheck. That leaves you with less income than you are used to and, for most people, puts you behind on your usual expenses. Therefore, to catch up so that you do not miss any bills due to your faxless payday loan, you go back and apply for another, or renew your current one.
One of the many problems with these types of loans is that until you break the cycle of borrowing, you never catch up.
As an example, a person who borrows $300 for two weeks with a fee of $10 per $100 borrowed would pay $330 for their cash loan. If annualized, that rate of interest would be 260 percent. A $30 fee may not seem like much at the time, and the payday advance industry says it's unfair to cite annual percentage rates when the borrowing period is only two weeks.
But if you need to roll over the loan, the costs accelerate quickly. To calculate the cost of a payday loan visit the Consumer Federation of America online.
- The CFA says the average payday borrower has 8-13 payday loans with a lender in a year.
- Using our example from above, if the average borrower renewed or took out a total of eight loans for your original $300, you would end up paying $240 in fees for a total of $540! That hurts!
Our advice to you is to not to look for a consolidation loan or program before you first figure out how you can start to live on what you earn, and then to begin to save money. Help is available for you and others who are trapped in this painful personal loan cycle.
Contact a reputable credit counseling organization, and it will help you by putting together a spending plan that will allow you to finally break the payday loan circle and move on with your life. You might want to start by contacting a member of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
Tell them you are interested in getting help with creating a budget and make a written action plan. The cost should be little, if anything, and you should be given a range of options by your counselors. Good luck!