Payday loans make it easy to quickly access cash, and lenders often don’t verify applicants’ credit or ability to repay. But there’s a catch: These loans are designed to trap you in a cycle of debt. Can payday loans be forgiven? Not exactly, but there are more options for payday loan relief than you might imagine. Here’s a closer look.
The Basics of Payday Loans
At first, payday loans might sound reasonable enough. You borrow a relatively small sum of money (usually less than $500) and then repay it by your next payday. Because of exorbitant interest rates and associated fees, however, these loans can snowball quickly.
According to the Consumer Financial Protection Bureau (CFPB), the average payday loan has an APR of around 400%. For the sake of comparison, most credit cards have an APR of about 12%–30%.
Unlike credit card companies, payday lenders will often require you to give them one of the following to receive your funds:
- A post-dated check for the whole amount (plus fees)
- An electronic transfer authorization
With either one of these in place, your lender will be able to take funds out of your bank account if you can’t repay the loan by the due date.
Payday loan terms clearly aren’t ideal. When you can’t qualify for a personal loan (or other kind of credit) and emergency expenses come up, though, a payday loan might be the best option you have.
Unfortunately, you might suffer further credit damage if you’re unable to pay back your loan on time. This makes it more likely that you’ll turn to payday loans in the future, keeping the vicious cycle going.
What Happens if You Can’t Pay Back a Payday Loan?
Dealing with payday loans is incredibly stressful, especially if you find yourself unable to pay by the due date. If you can’t pay the debt, one or more of the following will usually happen:
- The lender will take the funds out of your account and overdraft it
- The lender will repeatedly contact you to try to collect
- The lender will sell the debt to a third-party collection agency
In some cases, you may be able to “roll over” a payday loan—instead of paying the full balance due, you just pay the fees, and the due date is extended. Interest continues to accumulate during this period. In many cases, payday loan borrowers end up repaying the face value of the loan many times over.
If the lender tries unsuccessfully to collect the debt or sells it to a third-party collection agency, you may face a debt lawsuit. This isn’t something you should ignore.
Failing to respond to a debt lawsuit usually means the collector wins by default. If this happens, they may be able to garnish your wages or take money from your bank account.
What Kinds of Payday Loan Relief Are Available?
Is there government help for payday loans? Generally, no, but that doesn’t mean you can’t access other kinds of payday loan relief. Here are a few common options that could help you escape the debt trap.
Extended Payment Plans (EPPs)
Some states require payday lenders to offer extended payment plans (EPPs) for borrowers who are struggling to repay on schedule. When you have an EPP, you’ll pay much less over time than if you roll the loan over.
Even if your state doesn’t require EPPs, your lender may voluntarily offer them, though most don’t advertise that fact. If you’re having trouble repaying, reach out to the lender to ask about extended repayment options. In almost every case, you must inquire about this option before the loan’s due date.
Debt Consolidation
You may have heard of consolidating credit card debt, but is there debt consolidation for payday loans? Fortunately, there is, and it can offer you a respite from rapidly accumulating interest, fees, and penalties. Here’s how it works:
- You apply and get approved for a debt consolidation loan
- The funds are deposited in your bank account
- You use the funds to pay off your payday loans
- You then make payments toward the consolidation loan balance
If you have credit card debt or other types of high-interest debt along with one or more payday loans, you may be able to consolidate these as well.
Debt Settlement
Debt settlement is another option that may help with payday loan relief, though it doesn’t always work in every situation. With debt settlement, you or a company working on your behalf negotiate with the lender to accept less than the total amount you owe. If the lender agrees, you pay the reduced balance, and the remaining debt is forgiven.
Not all payday lenders are willing to settle, but some may prefer receiving part of the balance in a lump sum rather than risking nonpayment.
Bankruptcy
Bankruptcy isn’t right for everyone, and it’s generally something you should only do as a last resort. If you have many debts you can’t realistically repay, few assets, and low income, Chapter 7 bankruptcy may be worth considering.
When you declare bankruptcy, an automatic stay is issued to stop collection actions on your debts. Once the process is complete, most unsecured debts—including most payday loans—will be discharged.
Caught in the Payday Loan Cycle? There’s a Way Out
You shouldn’t feel embarrassed or ashamed if you’ve found yourself trapped in an endless cycle of payday loans. These loans are specifically designed to draw in desperate people and smother them with debt.
Lenders count on borrowers not knowing they have options for payday loan relief. When you know your situation isn’t hopeless, you’ll be better equipped to free yourself from the cycle forever.
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