How to Manage Payday Loan Debt

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By Janet Berry-Johnson, CPA

Payday loans sometimes seem like the only option for people with poor or no credit who need quick access to cash. But these types of loans are notorious for their high interest rates and tendency to trap people in a cycle of debt.

If you're struggling with payday loan debt, there are options that can help you escape. First, let's get clear on what exactly is a payday loan.

In this article

What is a payday loan?

Payday loans might go by other names, including cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans. Whatever you call it, they are typically short-term, high-cost loans that are supposed to be repaid on your next payday, or two to four weeks from the date the loan was made.

Some states set limits on payday loan sizes, but these loans typically range from $50 to $1,000.

When you take out the loan, the payday loan lender may require you to provide a post-dated check for the full balance, including fees. Or they may require an authorization to withdraw funds from your bank account electronically, depending on the loan term.

If you don't pay the loan in full on or before the due date, the lender will cash the check or electronically withdraw the balance due from your account – whether or not you have enough funds available. This can lead to overdraft fees from your bank, making a bad financial situation even worse.

Some payday lenders allow the borrower to roll the balance due into a new loan or renew the existing loan. This might sound like a good deal because it gives the borrower more time to pay, but according to the FTC:

"The fees on these loans can be a percentage of the face value of the check – or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or rolled over."

The CFPB found that 80% of payday loan borrowers roll over or renew their loans at least once, and 15% of those end up renewing their loans ten times or more.

These rollovers leave many borrowers stuck in a payday loan trap.

What happens when you default on a payday loan?

Watch out for any advice that suggests you can stop paying payday loans legally or that recommends stopping payments in order to convince your lender to negotiate. Payday loan lenders can be quick to turn over defaulted loans to a collection agency.

Payday loans aren't listed on your credit report, so paying them off as agreed won't help your credit score. But having your loan turned over to collections will almost certainly hurt your credit score.

Most third-party debt collectors furnish information to the credit reporting agencies, creating a negative entry on your credit report and lowering your credit score.

Even if you're later able to pay off the delinquent balance, that negative item will remain on your credit report for seven years.

Some lenders may also sue you for non-payment. If the lender wins, not only will you have a judgment against you for the amount you owe, but that amount will likely grow to include court costs and attorney fees.

And the lender may be able to take a portion of your paycheck as a wage garnishment.

Options to manage payday loan debt

If you've taken out a payday loan and find yourself struggling to get out from under growing debt, you have options.

Option 1 - Ask for an extended payment plan

Some states require payday lenders to offer extended payment plans (EPPs). These plans let you repay your debt over an extended period. But the laws vary by state.

For example, in Michigan, payday lenders aren't required to offer EPPs. Lenders in the state can choose to provide EPPs, but state law limits the extended payment period to just 31 days from the loan's original due date. That doesn't give borrowers a whole lot of wiggle room.

However, Michigan law prohibits payday lenders from charging a fee for an extension and prevents them from increasing the original loan amount.

On the other hand, Illinois entitles borrowers to enter into an interest-free repayment plan after the borrower has been in debt for more than 35 days. That gives the borrower at least 55 days to repay the loan in installments. The lender isn't required to offer the EPP – the borrower must request it.

To learn more about the EPP laws in your state, check out the Consumer Federation of America's Payday Loan Consumer Information directory.

Option 2 - Consolidate your payday loan debt

Payday loan debt consolidation involves taking out a personal loan and using it to pay off one or more high-interest payday loans. According to Experian:

"The trick for most payday loan candidates, of course, is that this strategy is based on the idea of getting a conventional loan from a bank or credit union, and most payday loan borrowers believe they will not pass the credit check required for a conventional loan. That assumption may or may not be correct, so it's worth exploring all options for getting credit when you have a questionable credit history – starting with checking your credit score to find out where you really stand."

Personal loans typically have lower interest rates than payday loans, so payday loan consolidation can save you money.

However, personal loans usually have higher minimum loan amounts than payday loans. While loan offerings vary from lender to lender, it's not unusual to see a minimum loan amount of $1,000. So you could wind up borrowing more than necessary to pay off your payday loan debt using payday loan consolidation.

Learn more about getting a debt consolidation loan with bad credit in this guide.

Option 3 - Consider a payday alternative loan

Credit unions created payday alternative loans (PALs) as a lower-cost alternative to payday loans. If you already have a payday loan, you may be able to use a PAL to pay off your existing loan and avoid the high costs of payday loan rollovers or renewals.

PAL amounts can range from $200 to $1,000, with loan terms of one to six months. The fees credit unions can charge for these loans are capped at $20.

These loans are available from federal credit unions, and in most cases, they don't even require a credit check. However, you must have been a credit union member for at least one month to be eligible.

Option 4 - Get payday loan help from a credit counselor

If you can't qualify for a personal loan or PAL, a federally accredited credit counselor may be able to offer payday loan debt assistance. Credit counselors can review your financial situation and debts and may recommend a debt management plan.

With a debt management plan, you make one monthly payment to the credit counseling agency, and the agency disburses payments for all of your unsecured debts, including payday loans, credit cards, private student loans, personal loans, and medical debts.

In some cases, the credit counselor may be able to negotiate with creditors on your behalf, getting them to lower your interest rate, waive fees, extend your repayment term, or even agree to accept partial payment on what you owe.

However, before signing up for any debt management plan, be sure you know what you're signing up for and who you're working with.

The debt relief industry is rife with scams that promise to settle or get rid of debts or provide debt settlement, but instead charge hefty fees, further damage the borrower's credit, and leave them worse off than they were before.

According to the FTC:

"Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate non-profit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals."

The United States Trustee Program also maintains a directory of reputable credit counseling agencies by state. You can also check out the agency with your state's Attorney General or Consumer Protection Office.

Learn more about credit counseling in this guide.

If your payday lender doesn't offer extended payment plans and consolidating your payday loan debt with a personal loan or PAL isn't an option, you might need legal help to deal with your payday lender.

David Reischer, an Attorney and CEO of LegalAdvice.com, recommends determining whether the payday loan is legitimate in the first place.

"Many payday lenders evade state law by associating themselves with a Native American tribe or going through a state with loose lending laws, or even operating offshore," Reischer says.

He says 12 states and the District of Columbia currently ban payday loans. Those states are:

  • Arizona
  • Arkansas
  • Connecticut
  • Georgia
  • Maryland
  • Massachusetts
  • New Jersey
  • New York
  • North Carolina
  • Pennsylvania
  • Vermont
  • West Virginia

"There is no federal ban on payday loans, but a qualified lawyer may be able to research state law and judicial opinion on the legitimacy of the payday loan to determine is such type of debt can be expunged," Reicher says.

If you're worried about the cost of hiring a lawyer, you might be able to qualify for legal aid. Some attorneys offer their services for free or charge a reduced fee for people who cannot afford to hire a lawyer.

You can search for a legal aid program in your state at LawHelp.org.

What to do after getting out of payday loan debt

Once you've escaped the trap of payday loan debt, try to avoid needing to rely on them in the future.

Here are three steps to take to help you stay out of payday loan debt in future:

Step 1 - Build up an emergency fund

Many people turn to payday loans to cover a financial emergency, such as medical expenses or unexpected auto repairs. An emergency savings fund can help you avoid payday loans by covering such unexpected costs.

Of course, if you're already living paycheck to paycheck, stocking away cash for a rainy day may seem impossible. But look for ways to cut back on spending or increase your income. Even small transfers to savings can add up to a lot over the course of a year.

Step 2 - Negotiate with your current creditors

Instead of turning to payday loans, try freeing up wiggle room in your budget by negotiating with your student loan servicer or credit card company. Explain your situation, and they may be willing to work with you on your interest or monthly payments.

Learn more ways to manage credit card debt in this guide.

Step 3 - Improve your credit score

Many people turn to payday loans because they can't get approved for loans through a bank or credit union. Take steps to improve your credit score, and you'll have more options for borrowing money when you need it.

Bottom line

Payday loans can provide short-term cash when you need it, but they can be a risky option for people without the financial resources to pay them off. The best way to manage a payday loan is to avoid them if at all possible and look for lower-cost options to meet your borrowing needs.

About the author

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets.

Written on October 15, 2020

Self is a venture-backed startup that helps people build credit and savings.
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