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Payday loans can seem like a lifeline when you need cash quickly, but they can quickly turn into a nightmare of debt. With annual percentage rates (APRs) that can exceed 400%, these short-term, high-interest loans are designed to trap borrowers in a cycle of borrowing and reborrowing. If you're stuck in the payday loan trap, know that you have options to break free and get your finances back on track.
A payday loan is a short-term, unsecured loan, usually for $500 or less. The loans are designed to be repaid with your next paycheck, typically within two to four weeks. To qualify, you must have a bank account, proof of income, and valid identification.
When you take out a payday loan, you write the lender a post-dated check for the full amount borrowed plus fees, or you authorize them to electronically withdraw the funds from your bank account on the due date. If you don't have enough money in your account to cover the transaction on the due date, you may be charged additional fees by both your bank and the lender.
The real danger of payday loans lies in their high cost. According to the Consumer Financial Protection Bureau (CFPB), the average two-week payday loan with a $15 per $100 fee equates to an APR of almost 400%. In comparison, APRs on credit cards typically range from 12% to 30%. The exorbitant interest rates make it very difficult to repay the loan on time, leading many borrowers to take out another loan to pay off the first - and so begins the payday loan trap.
The payday loan business model relies on repeat borrowing. According to the CFPB, more than 80% of payday loans are rolled over or followed by another loan within 14 days. Borrowers typically take out an average of 10 loans per year and spend more than 200 days in debt annually.
The cycle begins when a borrower can't afford to repay their initial payday loan on the due date. Instead of defaulting, they opt to pay only the fees due and roll over the loan into a new one with a fresh set of fees. Over time, the fees add up, and the borrower may end up owing several times the amount they originally borrowed.
For example, let's say you take out a $300 payday loan with $45 in fees. On the due date, you find you don't have the $345 needed to pay off the loan. So you pay the $45 in fees and roll the loan over into a new one, with another $45 fee. If you continue this pattern for five months, you'll end up paying $225 in fees on the $300 loan, and you'll still owe the original $300.
The key to breaking this cycle is to stop taking out new payday loans. But that can be easier said than done when you're living paycheck to paycheck. If you're currently stuck in the payday loan trap, the following strategies may help you escape.
Though it may feel overwhelming, there are steps you can take to get out of the payday loan cycle:
Under Washington state law (RCW 31.45.084), if you notify a payday lender that you cannot pay your loan prior to the due date, the lender must inform you that you can request an installment plan with no additional fees.
For loans of $400 or less, the plan must give you at least 90 days to repay in installments. For loans over $400, you must be given at least 180 days. The lender cannot charge you any additional fees for entering into the plan.
To request an installment plan, you must return to the location where you took out the loan. If you took out the loan online, you must contact the lender through their website. The request must be made on or before the loan's due date.
Once you've entered an installment plan, the lender can still charge you a one-time default fee of $25 for any missed installment payments. However, they cannot initiate any collection activities against you or threaten criminal prosecution for failure to pay.
Many communities have nonprofit organizations, charities, and religious institutions that offer financial assistance to those in need. Some programs are designed specifically to help people escape payday loan debt.
One such organization is Exodus Lending, a Minnesota nonprofit that pays off residents' payday loans and gives them 12 months to repay the balance interest-free. To qualify, borrowers must have taken out loans from a licensed Minnesota lender and have a steady source of income that doesn't exceed 200% of the federal poverty level.
If you don't have access to a payday-specific program, more general sources of assistance may still help alleviate a portion of your debt burden or living expenses. Many localities offer rent assistance, utility bill assistance, food banks, and free financial counseling. A simple internet search for "financial assistance programs in [your city/county]" is a good place to start.
Credit counseling agencies are non-profit organizations that help consumers manage debt and improve their overall financial health. Many offer free or low-cost consultations where you can discuss your situation with a certified counselor and get personalized advice.
During a credit counseling session, the counselor will review your income, expenses and debts. They may help you create a budget, suggest ways to increase your income or cut expenses, and educate you about your options for dealing with creditors.
In some cases, the agency may recommend a debt management plan (DMP). Under a DMP, you make one monthly payment to the counseling agency, which then distributes the funds to your creditors according to a pre-negotiated payment schedule. DMPs typically last 3-5 years and may come with a small monthly fee, but they can help you secure lower interest rates and waived fees from creditors.
To find a reputable credit counseling agency, look for one that is accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Avoid any agency that tries to charge large upfront fees or make promises that sound too good to be true.
If you have a relationship with a bank or credit union, they may be willing to give you a small personal loan to consolidate your payday debt. Credit unions in particular often have programs designed to help members escape the payday loan cycle.
For example, the National Credit Union Administration (NCUA) allows federal credit unions to offer Payday Alternative Loans (PALs). PALs are loans of $200 to $1,000 with terms of one to six months. Interest rates are capped at 28%, and application fees cannot exceed $20. To qualify, you must have been a member of the credit union for at least one month.
Some credit unions also offer more general small-dollar loans outside of the PALs program. These loans may have slightly higher interest rates, but they're still much cheaper than payday loans. For example, the Seattle Metropolitan Credit Union offers personal loans as small as $500 with an APR of 15% for borrowers with bad credit.
Even if you don't belong to a credit union, it may be worth joining one to access these types of loan programs. Many credit unions have relaxed membership requirements, such as living, working, or worshiping in a certain area. You can use the NCUA's Credit Union Locator tool to find credit unions near you.
Asking a loved one for financial help is never easy, but it can be a better alternative to staying trapped in payday loan debt. If you do decide to borrow from a friend or family member, be sure to draw up a written agreement that specifies:
Treating the loan like a business transaction can help avoid misunderstandings and preserve your relationship. Be upfront about your situation, offer a reasonable repayment plan, and stick to your commitments.
If you're uncomfortable asking for a loan outright, consider asking for a gift instead. Even a small cash infusion can help you break the borrowing cycle and start paying down your debt.
If you have decent credit, you may qualify for a lower-interest personal loan from a bank, credit union or online lender. Personal loans typically come with fixed interest rates, fixed monthly payments, and repayment terms of 12 to 60 months.
Using a personal loan to pay off a payday loan can help you get control over your debt in a few ways:
Before taking out a personal loan, be sure to shop around and compare offers from multiple lenders. Look for a loan with an APR and monthly payment that comfortably fits your budget. Use a personal loan calculator to estimate your payments based on different loan terms and amounts.
Also keep in mind that most personal loans come with origination fees of 1% to 6% of the loan amount. These fees are usually deducted from your loan proceeds, so borrow a bit more than you need to cover the fee.
No matter what debt relief strategy you choose, it will only work if you stop taking out new payday loans. As long as you're paying high fees to borrow and reborrow small sums of money, it will be very difficult to get ahead.
To avoid the temptation of easy payday cash when money is tight, try implementing some or all of the following tips:
Breaking the payday loan cycle requires dedication and discipline, but it is possible. If you slip up and take out another loan, don't beat yourself up - just get back on track as quickly as possible. Each day you go without borrowing gets you one step closer to financial freedom.
Once you've stopped taking out new payday loans, focus all your energy on paying off your existing debt as quickly as possible. The faster you can pay off the principal, the less you'll pay in interest over the life of the loan.
If you're on a tight budget, paying extra on your payday loans may seem impossible. But even small extra payments can make a big difference. For example, let's say you have a $300 payday loan with a 15% interest rate and a two-week term. If you pay $45 every two weeks, it will take you nearly four months to pay off the loan, and you'll end up paying a total of $360 ($300 principal + $60 in interest).
Now let's say you manage to scrape together an extra $10 per pay period to put toward the loan. You'll be debt-free in just over three months, and you'll save $15 in interest overall. The more you can pay above the minimum, the more you'll save and the sooner you'll be free of payday loans.
Here are a few ideas for finding extra money to pay down your loans:
Every extra dollar you put towards your payday loans is a dollar less that you'll pay in interest. Keep making extra payments until your balance reaches zero, then celebrate your success!
If your payday loan debt is part of a larger debt problem, bankruptcy may provide a solution. While bankruptcy should be a last resort after you've exhausted other options, it can offer a fresh start for people who are drowning in bills with no hope of repaying them.
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, your non-exempt assets (property that isn't protected by federal or state law) are liquidated and the proceeds are used to partially repay your creditors. Most remaining unsecured debts, including payday loans, are discharged.
Chapter 13 bankruptcy allows you to keep more of your assets, but requires you to make monthly payments to a trustee for three to five years. The trustee distributes the money to your creditors according to a repayment plan approved by the court. At the end of the repayment period, most remaining unsecured debts are discharged.
Both types of bankruptcy will stay on your credit report for seven to ten years and can make it difficult to qualify for new credit in the near future. But they also offer powerful debt relief and the chance to rebuild your finances.
If you're considering bankruptcy, the first step is to consult with an experienced bankruptcy attorney who can evaluate your case and explain your options. Many attorneys offer free initial consultations. You can use the National Association of Consumer Bankruptcy Attorneys' (NACBA) attorney finder tool to locate a bankruptcy lawyer near you.
If you can't repay your payday loan on the due date, the consequences can be severe. Here's what you can expect:
When you took out the loan, you either wrote the lender a post-dated check or gave them permission to electronically withdraw money from your bank account. If there's not enough money in your account to cover the transaction on the due date, the lender will keep trying to collect.
Each failed attempt can trigger overdraft fees from your bank, and you could also face fees from the lender for a returned check or declined electronic transaction. These fees can quickly add up, further damaging your finances.
If you continue to not pay, the payday lender will eventually send your account to a collections agency. The debt collector will attempt to contact you via phone, email, and postal mail to demand payment. They may also report your unpaid loan to the credit bureaus, which can severely damage your credit score.
Debt collectors are known for using aggressive tactics to try to get borrowers to pay up. They may call you at all hours of the day and night, show up at your workplace, or contact your friends and relatives about your debt. While some of these practices are illegal under the Fair Debt Collection Practices Act (FDCPA), many debt collectors flout the law.
If the debt collector is unable to get you to pay through their usual methods, they may decide to file a lawsuit against you to collect the debt. If they win the lawsuit, the court will enter a judgment against you. The judgment will state the amount of money you owe, which may include additional court fees and attorney's fees on top of your original debt.
Once the debt collector has a judgment, they can ask the court for a wage garnishment order. This requires your employer to withhold a portion of your paycheck and send it directly to the debt collector each pay period until your debt is repaid. The maximum garnishment amount is 25% of your disposable earnings or the amount by which your disposable earnings exceed 30 times the federal minimum wage, whichever is less.
For example, let's say you owe $500 in payday loan debt and $200 in court fees and attorney's fees, for a total judgment of $700. If your disposable earnings are $1,000 per week, 25% of that ($250) would be garnished each week until your debt is repaid in full, plus any post-judgment interest. At that rate, it would take nearly three weeks to satisfy the judgment, assuming you have no other outstanding garnishments.
In addition to or instead of wage garnishment, the debt collector may also seek a bank levy. This allows them to seize money directly from your bank account to satisfy the judgment. The bank must comply with the levy order and freeze your account, preventing you from accessing your funds until the debt is repaid or the levy is released.
Bank levies can be particularly devastating because they happen without warning, leaving you with no money to pay rent, buy groceries, or cover other essential expenses. And if your account is levied when there's not enough money to cover outstanding checks or automatic bill payments, you'll be hit with additional insufficient funds fees.
To avoid a bank levy, some people try to close their bank accounts and open new ones at another institution. But this strategy doesn't always work. If the debt collector learns about your new account, they can still seek a levy against it.
Depending on your state's laws, a judgment creditor may also be able to place a lien on your home or other property. A lien is a legal claim that gives the creditor the right to seize and sell your property to satisfy the judgment if you don't pay voluntarily.
For example, if you own a home, the creditor could force a sale of the property and take the proceeds to pay off your debt. Or if you own a vehicle outright, the creditor could have it seized and sold at auction.
While state and federal laws protect certain types of property from seizure (known as "exempt" property), the rules vary widely. In some states, creditors can seize virtually all of a debtor's assets to satisfy a judgment. To find out what property is exempt in your state, consult with a local consumer law attorney or legal aid organization.
If you're struggling to repay a payday loan, your bank may be able to offer some relief. Here are a few options to explore:
If you have a linked savings account, line of credit, or credit card with your bank, you may be able to set up overdraft protection on your checking account. This means that if a payday lender attempts to withdraw more money than you have in your account, the bank will cover the transaction with funds from your linked account, up to a certain limit.
Overdraft protection can help you avoid expensive overdraft fees and keep your account in good standing. But it's important to remember that you're still responsible for repaying the overdrawn amount plus any interest or fees charged by the bank. If you don't pay it back promptly, you could end up trading payday loan debt for overdraft debt.
Under the Electronic Fund Transfer Act (EFTA), you have the right to stop payment on a preauthorized electronic fund transfer (EFT) by notifying your bank at least three business days before the scheduled transfer date. You can do this by phone, in writing, or in person.
If you gave the payday lender authorization to electronically withdraw funds from your account, revoking that authorization will prevent them from continuing to attempt withdrawals once you've notified your bank. This can give you some breathing room to negotiate with the lender or seek other debt relief options.
Keep in mind that revoking EFT authorization doesn't cancel your contract with the lender or relieve you of the obligation to repay the loan. The lender can still attempt to collect the debt through other means, such as phone calls, letters, or legal action.
If you wrote the payday lender a post-dated check when you took out the loan, you may be able to stop payment on the check to prevent the lender from cashing it. To do this, you must give your bank a stop payment order at least three business days before the check is scheduled to be processed.
Stop payment orders typically last six months unless you renew them. Your bank may charge you a fee for each stop payment order, but it's usually less than the fee you'd pay if the check bounced.
As with revoking EFT authorization, stopping payment on a check doesn't cancel your obligation to repay the loan. The lender can still pursue collection activities against you.
As a last resort, you may consider closing your bank account to prevent the payday lender from accessing your funds. This is a drastic step that can have serious consequences, so consider it carefully before proceeding.
If you close your account while there are still outstanding checks or electronic withdrawals pending, those transactions will bounce and you'll likely be charged fees by both your bank and the payees. The payees may also report the bounced payments to credit bureaus, damaging your credit score.
Furthermore, some banks will not allow you to open a new account if you have an outstanding balance at another bank or unpaid fees. So before closing your account, make sure you have another account lined up and enough money to cover any outstanding transactions and fees.
Closing your bank account also doesn't erase your obligation to repay the payday loan. The lender can still attempt to collect through other channels, including phone calls, letters, and legal action. And if they win a judgment against you, they may be able to garnish your new bank account or your wages.
Yes, under Washington State law, all payday lenders are required to offer payment plans to borrowers who request them before their loan is due.
To request a payment plan, you must return to the store where you got your loan and submit a request in writing. You can't make a request by phone or online.
The lender must allow you to repay your loan balance in at least four equal installments over a period of at least 90 days for loans of $400 or less, or 180 days for loans over $400. They can't charge any additional fees or interest on the payment plan.
For example, let's say you took out a $300 payday loan with a 15% fee, for a total amount due of $345. If you request a payment plan, the lender must allow you to pay that balance back in four installments of $86.25 each, due every two weeks over 90 days.
To qualify for a payment plan, you must request it on or before the loan's due date. If you've already extended or "rolled over" your loan (paid only the fees and extended the due date), you're no longer eligible for a payment plan and must pay off the full amount due.
Requesting a payment plan is usually a better option than simply not paying or rolling over your loan, because it lets you pay off your balance over time without additional costs. But you must be proactive in requesting the plan before your loan is due.
Under Washington State law, you have the right to cancel your payday loan at no cost until the close of business on the next day of business after you took out the loan. This is known as your "right of rescission."
To exercise your right of rescission, you must return to the store where you got the loan and repay the full amount in cash or by check. The lender must then cancel any electronic withdrawal authorization and return or destroy your post-dated check.
For example, if you took out a loan on Tuesday morning, you have until close of business on Wednesday to return to the store and cancel the loan. If the store is open 24 hours, you have until midnight on Wednesday to cancel.
Keep in mind that you can only cancel a loan that hasn't yet come due. Once the loan's due date passes, you can no longer rescind the transaction and must either pay off the loan or request a payment plan.
No, the lender cannot charge you any fees for canceling your loan within the rescission period. If they attempt to charge you a cancellation fee, point out that the fee is illegal and report them to the Washington State Department of Financial Institutions at 1-877-RING-DFI.
It's also illegal for the lender to refuse to cancel your loan during the rescission period or tell you that you can't cancel once you've signed the loan agreement. If you encounter these practices, report the lender immediately.
No, this is never a good idea. "Rolling over" or reborrowing a payday loan just extends your debt trap and costs you even more in fees and interest. According to a 2019 report from the Consumer Financial Protection Bureau, more than 80% of payday loans are rolled over or followed by another loan within 14 days. The average payday loan borrower ends up taking out 10 loans per year and spends nearly 200 days in debt.
Instead of reborrowing to deal with an overdue payday loan, request a payment plan with the lender. Under Washington law, lenders must offer payment plans that let you pay back your balance in at least four installments over 90 to 180 days, without taking on any additional fees or interest. This will allow you to spread out your payments and break the cycle of rolling over your loans every two weeks.
If you're already in a cycle of reborrowing, know that you're not alone. Payday loans are designed to be difficult to escape from. But with a bit of planning and perseverance, you can break the cycle and get back on solid financial ground.
While closing your bank account may seem like a way to stop a payday lender from collecting on your debt, it often causes more problems than it solves. Here's what can happen when you try this tactic:
When you write a post-dated check or authorize an electronic withdrawal, you give your bank permission to pay those funds when they're requested. Even if you close your account, the bank may still allow the payment to go through under certain circumstances, such as if they haven't had time to process your account closure request.
If the payment overdraws your closed account, the bank will likely charge you fees for both the overdraft and the account closure. These fees can quickly add up and leave you owing even more money.
Just because your account is closed doesn't mean your loan agreement goes away. You still owe the lender the agreed-upon amount, and they can continue to attempt collection through other means.
If the lender's attempts to withdraw funds from your closed account fail, they will likely charge you returned payment fees in addition to late fees. They may also send your debt to a third-party collections agency, which can lead to harassing phone calls, negative credit reporting, and even legal action against you.
Most banks check a national database of consumer banking history before allowing you to open a new account. If you have an unpaid negative balance or multiple overdrafts on your record, you may be denied a new account until you resolve those issues. This can leave you without access to crucial banking services you need to manage your finances.
Instead of closing your account to avoid a payday lender, try contacting the lender directly to request a payment plan or make a settlement offer. If you can't reach an agreement, consider seeking help from a credit counseling agency or bankruptcy attorney before resorting to closing your account.
Most of the time, no. Under federal law, Social Security and Veterans Affairs benefits are exempt from garnishment for consumer debts like payday loans. The same is true for most pensions and retirement accounts. These sources of income usually can't be seized by a judgment creditor as long as they're direct deposited into your bank account.
However, if you commingle (mix) exempt benefits with non-exempt funds in the same account, the non-exempt funds may lose their protected status. For example, if you receive a $500 Social Security direct deposit and then deposit a $200 check from a friend into the same account, those non-exempt funds could be fair game for garnishment unless you can prove they came from another exempt source.
To avoid losing your exempt benefits to a payday lender that has sued you, follow these tips:
Remember, even if your income is exempt from collection, a judgment will still appear on your credit report and impact your ability to borrow for years to come. Do everything you can to avoid having a payday lender or any creditor obtain a judgment against you in the first place.
Payday loans put borrowers in a vicious cycle of debt that is designed to be difficult to escape from. With triple-digit interest rates and short repayment terms, the vast majority of payday loan borrowers end up having to reborrow again and again just to keep up with the fees.
If you're stuck in the payday loan trap, know that you have options. Request a no-cost extended payment plan from your lender, seek credit counseling, or look into debt consolidation or bankruptcy. Whatever route you choose, commit to not taking on any new payday loans so you can finally break the cycle.
Most importantly, don't be ashamed to ask for help. There are many organizations, both locally and nationally, that specialize in helping people like you recover from payday loan debt. With the right support and a solid plan, financial freedom is possible.
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
Paying off a payday loan generally will not improve your credit score because most payday lenders don't report to the main credit bureaus. However, failing to pay can hurt your score if the lender sells your debt to a collections agency that does report. The best way to help your credit when dealing with payday loans is to avoid taking them out in the first place.
Payday loans are hard to pay off for a few key reasons:
Because of these factors, the vast majority of payday loans end up being rolled over or reborrowed within two weeks. This starts a dangerous cycle of debt that is very difficult to break free from.
The consequences of defaulting on a payday loan can be severe and long-lasting. Here are a few of the things that can happen:
To avoid these outcomes, try to work with your lender on an extended repayment plan or seek debt relief through a credit counseling agency or bankruptcy if needed. Don't simply ignore the debt and hope it goes away - it won't, and the consequences will only get worse over time.
