In the beginning, a payday loan seems to be the practical thing to do in order to cover the emergency need for money. The need for money could be a lot of things, such as to pay for tuition, to buy books and clothes, to have pocket money for a planned travel. And so let’s say a payday loan of $1,000 was obtained. The interest is $15 for every $100. For this particular loan, the total interest is $150. This payday loan is a short-term loan and the original plan was to settle the full amount, which is $1,150, within two weeks.

However, this plan was unrealistic. There are numerous bills to pay and there was again another need for emergency money. The payday loan could not be paid off and the debt had to be extended for another two weeks or to the next payday. This extension of debt is usually called the roll-over. The payday lender will charge the interest only, which is $150. Then another payday passed and the loan is still there. This time, the borrower had paid a total of $300 of interest.

It does not take a degree in rocket science to realize that if this payday loan is never paid, the sum of the interests paid every month would eventually become more than the actual amount that was loaned in the first place. This loan must be paid. The question is how?

Some people make the mistake of taking another payday loan to pay off the first one. This new payday loan, however, must be larger so that it can cover the previous debt plus the loan fees. The result is that the borrower now has a larger debt. The payday loan has trapped him into a cycle of debt that is difficult to escape. But there are still a few ways to get out of this debt cycle.

The first and most sensible of all is to stop getting more payday loans. The payday loan is a financial trap. It is illogical to believe that getting out of one financial trap means getting into another. Acquiring another payday loan to pay off the previous one is the worst thing that a borrower can do.

The next step is to establish a better method of payment. The ideal method of payment is to have a fixed amount to be paid monthly. A part of this fixed amount goes to interest while another part goes to the debt. In this manner, the debt is decreased every month. If the payday lender refused to agree to such a payment method, then the borrower can seek the help of the state government.

Another route to take is to discontinue the access of payday lenders into the borrower’s bank account. This can be done by contacting the bank, which can decline any request to withdraw funds from the borrower’s account. The payday lender usually sends such request to withdraw funds electronically and the banks can easily stop payments to the lender.

Some banks would advise the borrower to close the existing checking account and open a new one. This move can protect the borrower from paying fees for Non-Sufficient Funds (NSF). The NSF is filed each time the payday lender attempts to cash in the post-dated check written by the borrower. With too many overdrafts, the bank will be forced to close the account and this will jeopardize the borrower’s financial credibility, prohibiting him from opening another checking account.

And finally, to escape the debt cycle, the borrower must seek the help of credit counselors. These professionals have the experience and know-how to deal with greedy payday lenders.

Stuck in the Payday Loan Debt Cycle?

Consolidate to get your rates lower. (APR 6.59% to 35.84%)

In a study conducted by the Federal Trade Commission (FTC), a disturbing profile of payday loan borrowers has been uncovered. The majority of the customers of payday loan companies are those who are already facing many financial difficulties and those who don’t have a strong knowledge about money management. To illustrate, consider these typical situations of a payday loan.

A person who obtains a payday loan is someone who needs quick funds to cover expenses that could not be shouldered by the cash on hand. This person may have a medical emergency and will not be in a position to pay off the payday loan in two weeks. A medical problem usually involves more expenses for several months. These medical expenses drain the pockets of the borrower. At the same time, the payday lender charges fees and interest throughout these problematic months.

In situations such as this, the payday lenders act like leeches draining the much-needed blood of sick people. Some payday lenders might be offended by this analogy but do their online application forms ask for the medical situation of the borrower? Do they first determine whether the borrower has the capacity to pay off the debt? The payday lenders never ask for pertinent information that will reveal the capacity to pay. Instead, they ask for social security numbers, bank account numbers, and copies of a signed check.

A person may also obtain a payday loan because he does not have any other sources of funds. This means that his credit cards may have been maxed out and the wage he receives is not enough to cover the bills and all other expenses. The wiser option would have been to consolidate the debts. Debt consolidation would mean lower interests. Instead, with payday loans, the person enters the trap of paying even higher interests.

The payday lenders don’t care about the borrower’s financial history or credit rating. The borrower may already be way in over his head in debts but the payday lenders are still willing to approve loan applications. With everyday expenses, the amount obtained from payday loans could not help a person pay off debts. Instead, he is in greater debt.

A person who acquires a payday loan is typically someone who is attracted by the convenience of payday loans but does not understand the financial ramifications of this action. Such a person, according to the FTC, is usually young and does not completely understand differences between loan fees and annual interest rates. Payday lenders use the trick of stating the interest rate in terms of amount, such as $15 for every $100 borrowed. But this interest is good only for two weeks. If translated into annual percentage rate or APR, this interest means 650%. It is absolutely higher than the highest APR of a credit card. In less than half a year, the borrower could be paying more for interest than the amount that was actually borrowed.

Based on the situations above and the study conducted by the FTC, payday loans are financial bad news and the payday lenders are similar to loan sharks who prey on people who are considered financially weak. This is probably the reason why payday loans are not considered legal by some states.

Payday loans have been known to place people in large debts that are almost impossible to pay off. The loan usually begins at $500 which must be settled within two weeks. Then the payday loan can be extended for another payday and perhaps into a few more months. It is a type of loan in which the credit history of the borrower is never checked. In exchange for the quick and guaranteed loan approval, the payday lender is given either a post-dated check or an authorization to automatically withdraw from the borrower’s checking account.

This nature of payday loans implies that it targets people who are in dire need of cash and without better financial means to obtain such cash. In other words, the payday lenders intended to provide loans to people who may not have enough financial capability to settle the loan. This keeps the borrower in debt until the total amount to be paid has increased five or six times higher than the initial loan. The borrower essentially becomes a victim of the payday loan trap.

To prove that payday loans are actually victimizing people instead of giving financial help, here are the descriptions of people who actually obtain payday loans.

One group of payday loan borrowers is composed of people who belong to the low income group. They can be people who are in welfare-to-work programs, retirees who rely on their monthly pensions, and military personnel. The common characteristic of these people is that they have a steady source of fixed funds every month but such funds are barely enough to meet all their expenses. And if the income receive every payday is barely enough, it means that the chances of paying off the payday loan are slim.

Another group of payday loan borrowers is made up of people who have poor credit history or poor credit ratings. They don’t pay their bills on time simply because they don’t have the money. And they have probably maxed out the limit of their credit cards. Without knowing better alternatives, these people view payday loans as the only way to quickly obtain cash. Unfortunately, they place themselves in a worse situation when they get payday loans.

And a third group of payday loan borrowers is composed of students and young people who can be considered financially naïve. Young people with new jobs may think that payday loans are new financial opportunities opened for them. They are probably not aware of the huge interests that entail payday loans. The students, who do not work or work part-time, should not be taking out payday loans, simply because they never get decent paychecks. But the unscrupulous payday lenders cater to students as well. These students and young people realize too late that with payday loans, they end up paying fees that are higher than the amount they borrowed.

And finally, the last group of payday loan borrowers is composed of people who are already in huge debts. A research conducted by the Center for Responsible Lending (CRL) in 2003 showed that about 91% of payday loan borrowers already have five or more outstanding payday loans. Some borrowers even have as many as 13 payday loans in one year.

Based from the above descriptions, the groups of people that take out payday loans do not have the financial capacity to recover the debts incurred from payday lenders. Instead, they become victims of payday loans.

One of the major types of loans in demand is the home equity loan. There are others as well, like the personal loans which are issued instantly without any need of credit by the pay day lenders according to the financial capability of the borrowers. There are a numerous options for applying loans online from the different loan companies with the reasonable interest rates. The credit cards are issued to cover the bad credit need loan for the individuals who seeks the debt consolidation for the secured future. The home loan bank has introduced the new policies of loan consolidation by reducing the home equity loans for the borrowers. The financial opportunities are offered by the different banks with the option to compare credit cards of different banks in accordance with the charges of interest.

Getting a payday loan is considered by many business experts as a financial suicide. To illustrate, consider a payday loan which is worth $200. The usual interest rate for such a short-term loan is 15%. This means that to pay off this loan, a borrower must write a personal check of $230 and it will be due in about two weeks.

Often, the borrower cannot pay off this payday loan in so short a time. And so the payday loan company offers the roll-over option. The roll-over is simply an extension of the loan and the borrower simply needs to pay the interest. In this case, the interest is $30. If the roll-over option is done four times, the total interest that the borrower had paid for a lousy $200 is $120.

Clearly, it is easy to reach the stage when the interest becomes higher than the principal. And this is why getting a payday loan is like committing a financial suicide. Unfortunately, there are inevitable circumstances in life that demands the need for extra funds, and the payday loan seems to offer an easy way out. But the easy way is not always the best way. There are other financial options that are better than payday loans.

One of the better financial options is to scout for sources of emergency cash that do not demand high interest rates. The most obvious source is either a member of the family or a friend. For people with close family ties, it is easier to disclose dire financial situations. Relatives and friends are often willing to help out. The only rule to remember is to pay them as soon as possible or even pay them in a manner similar to credit cards: partial and regular payments. The best part is that there is no interest to pay.

If borrowing from friends and family gives an uncomfortable feeling, another financial option is to get an advance pay from the employer. Many employers are sympathetic to their employees, especially if the employees clock in valuable work. It never hurts to check out the possibility of obtaining an advance pay. The advance pay does not demand interest. But it does mean that the future work is already paid. This means that to be able to receive some wage on payday, a person should put in more hours of overtime work.

Another source of emergency funds is the credit card through the procedure called cash advance. Credit card advances demand interest. But, when the annual interest rate of the credit card is compared to the annual interest rate of payday loans, the credit card becomes a wiser option. When there is more than one credit card available, it is best to compare their interest rates.

Some credit cards have interest rates for cash advances that are different from those for purchases. These have to be checked too. Once interest rates are compared, the next thing to do is to get a cash advance from the credit card that offers the lowest rate. If the credit card is not a viable option, there are community-based organizations that offer loans to individuals who are members of their community. They still charge lower interests than payday loans.