How to get out of payday loan debt
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What are payday loans
Payday loans are also known as “cash advance loans”. The lender will accept a postdated check for a fee, or accept a check with the current day’s date and hold it until the borrower’s next payday.
These are high risk loans and come with a large fee and interest and the borrower will usually have to pay up in two weeks or by his next payday.
If the borrower fails to repay on time, the lender will try to collect not only the original amount, but also a higher interest and penalties.
How do payday loans work
Payday loan lenders charge a “service fee” that works like interest for the loan. For example, for a $200 loan, the lender will encash the borrower’s check for $225 in two weeks. This makes the annual percentage rate 325%. Comparatively, the average rate from a bank would only be about 12%.
If the borrower can’t repay on time, the lender can add a $15 fee to the payday loan. A payday loan is overdue when it has not been repaid within 10 days after its due date. The fees will continue to be charged until the entire amount is repaid. After the 10-day period, the lender must provide the debtor 20 days of notice, thus providing him a chance to pay off the loan. After the notice period, the lender may sue the borrower in court for the unpaid loan amount plus fees.
Why payday loans are not always a good idea
Payday loans have much higher interest rates – for example, for a $200 payday loan taken out every two weeks for one year, the interest charges would be $650. For the same loan amount from a bank, the interest rate is only 12% interest for a year, or only $24 a year.
Payday loans are hard to be repaid by the next payday and borrowers often get trapped in a cycle of debt. That’s why, instead of taking out a payday loan, debtors should call their creditors to try work out a payment plan. Local banks and credit unions often provide short-term loans with a low interest rate that cost less than payday loans. There may also be overdraft protection services that will help avoid overdraft charges.
What is debt relief
Debt relief is any type of payday loan debt assistance that helps you find some reduction in the amount of debt, monthly payments, or in the overall cost of repaying the outstanding amount that you have. For example, a reduction in interest rates is debt relief.
If you are struggling with payday loan debt repayment, there are several potential solutions, such as payday loan debt management, payday loan consolidation and payday loan debt settlement.
Before getting payday loan debt relief
Firstly, you should be aware of how much you owe exactly. That is why you should make a list of lenders, calculate total interest rate and owed amount before you settle your payday loans.
Secondly, you should check your lender’s license and explore state payday loan lending laws to avoid scams. Payday loans are not legal in every state.
Thirdly, you should cancel your ACH authorization to prevent your payday loan lenders from emptying your bank account.
Payday loan debt management
Debt management services work with debtors to create a budget and help them manage their finances. These organizations may help to reduce the interest rate and assist in making payments on time. Some of them also help with paying off the debt through settlement offers to lenders.
If you’re concerned about loan repayment, or if you’re struggling financially, debt management could be a way out. The credit counselors will explain how to get out of payday loan debt legally. They’ll give their clients an affordable monthly payment plan after negotiating with the creditors. Sometimes, managing debt seems overwhelming, so the sooner you start to deal with the problem, the easier it’ll be to manage. You should not ignore the problem because it may affect your ability to get credit in the future. You should get in touch with your creditor, whether it’s a bank, mortgage provider or utility company. They may be ready to offer a solution like a new payment schedule, payment holiday or a change in deadline. In case you have multiple debts, you should know how to prioritise them. Debts like rent, mortgage, gas and electricity, council tax, court fines are priority debts. The law allows creditors to take measures to receive their money back, like repossessing your house if you fail to repay your mortgage. Do not ignore the warnings that you receive and act fast.
The mortgage, for example, is a ‘priority debt’. If you miss repayments, your home may be repossessed. In that case, contact your lender at an early stage and they may try to arrange a new mortgage plan while giving you a reasonable amount of time to pay back any outstanding payments, and will only start to repossess your house as a last resort.
Nevertheless, consumers should always be clear on how much they need to borrow and how much it will cost to repay. Payday loans often have extremely high interest rates and can negatively impact your credit score. There are alternative long and short-term options, so it is better to shop around.
Also, borrowers may try contacting a not-for-profit debt-counselling organisation that offer free, confidential support and they may be able to help you with prioritising your debts or negotiate with creditors.
Payday loan debt consolidation
Payday loan consolidation programs allow debtors to consolidate their payday loans into one monthly payment. These programs can help managing payday loans and regaining control of the borrower’s paychecks. Payday loan consolidation companies offer a monthly payment plan that will fit the borrower’s income level. He’ll attain financial freedom once he completes the payment plan.
There are two main ways to do this. The debtor works with a professional third-party counselor who negotiates with his lenders to reduce the amount he owes, so that he can afford to make one payment each month. Or the debtor secures a large loan or credit card and uses them to repay his smaller, higher-interest rate loans. This is often difficult to do if he has bad credit, since it requires having home equity or good credit.
Consolidation makes it easier for debtors to repay the debt because they have just one payment to make each month. It does not necessarily reduce the total amount. Sometimes, counselors are able to reduce the amount owed, but this is not always the case.
Consolidation companies work with payday creditors to lower interest rates and repayment amounts. They consolidate all payday loans into one single monthly payment which usually greatly reduce monthly repayments. Regardless of financial status, most debtors can benefit from the option getting interest rates lowered. Thus, they can avoid bankruptcy, improve their credit, stop late and over limit fees, and stop getting harassing calls from their creditors.
The payday loan industry is notorious for charging high interest rates and fees on consumers who are unable to get loans elsewhere. For most people, the debt cycle gets worse if they take out new payday loans to either pay off other debts or previous payday loans. Payday loan consolidation is a way to get out of the debt cycle and makes repaying loans much faster. Usually, it takes from 6 to 18 months to get the debts repaid. Consolidation companies can work with debtors to consolidate their payday loans into a lower monthly repayment amount with consolidation programs even if the debtors have bad credit. The balances the debtors owe the payday lenders are consolidated into a monthly or bi-monthly payment that is affordable and doesn’t harm your budget. Reputable consolidation companies start negotiating and paying the lenders upon the debtor’s enrollment and are proactive in their efforts to help their clients.
Payday loan consolidation benefits include quick repayment of debt with no minimum financial requirements. There are also lower interest rates on the current unsecured debt. There is no waiting period before getting started. Consolidation helps to develop a sensible budget for the debtor and there is no hidden cost. Of course, it is better to work with a BBB rated consolidation company.
Their services include termination of the plan that the debtor is unable to fulfill, and they will also work towards identifying a plan that will accurately reflect the debtor’s ability to pay off his debt. Their goal is to provide their clients with customer service as well as satisfaction for their consolidation needs.
Payday loan debt settlement
This is a process where the debtor pays less than what he owes. The process is fast so that the debtor is be able to save money within a short span of time. This process helps get rid of payday loans legally, while saving the debtor’s paycheck every month. It helps lower the APR. Debt settlement helps the debtor to avoid lawsuits, collection harassment, late fees and penalties, while lowering the loan amount itself.
Sometimes the debtor wants to settle his outstanding financial obligations and lenders are willing to work out a realistic mutually agreed compromise with him, because they feel that he may default or file bankruptcy if they do not settle for less than what he actually owes.
Third-party companies can help with this negotiation process and it may be even possible to see a considerable reduction of 20 to 75 % of the owed amount through this strategy. However, the debtor agrees to pay the balance in full once he reaches an agreement with the creditor.
To deal with payday loan debt through debt settlement program, the debtor has to enroll in a program and list the loans he wants to settle. The settlement company will calculate how much he owes and then begin negotiations to reduce the outstanding balance to an amount he can afford to pay. Then he can save money in his dedicated account while the company arranges the lenders to settle the payday loan debt. After an agreement is signed, the debtor proceeds with making payments and getting payday loan debt relief. The settlement attorneys will help eliminate payday loans without paying additional interest rates and fees.
Choosing the most appropriate payday loan settlement company
There are several factors that you should check when choosing a good settlement company you want to work with. The company should have an affordable fee structure. Also, it is better if they are affiliated with TASC. Check if you’ll get a refund if they can’t help you pay off payday loans and how exactly how they intend to give you payday loan relief. Do a little research on their industry experience.
Nevertheless, it is better not to try to get out of payday loan debt on your own, because you may not know which lenders are legal and which are not. You may not be able to settle payday loan debt with your lenders alone. You may not know how to conduct the negotiations. You are also not familiar with state and federal payday loan laws on an expert level. Also, payday loan settlement companies usually have better terms with lenders.
This is the worst way to eliminate payday loan debt because it drops the debtor’s credit score by 200 points and more.
Payday loan scams
If you notice a potential scam, you should report this to the CFPB, the State Attorney General or the FTC.