The allure of a quick fix can make payday loans very tempting, especially when in need of quick cash. Unfortunately, what many learn, including our reader Benny, is that more often than not the short-term gain of a payday loan means long-term pain. Read along as Accredited Financial Coach, Sherry, will walk us through what to do to get out of a payday loan cycle.
The question
I really try to stay on top of my money, but I keep finding myself needing quick cash. To make do I started taking out payday loans. I have 6 of them now and I can’t keep up. It just keeps getting worse. I can’t sleep. How can get out of this mess?
Benny T., Whistler BC
The answer
I’m very sorry to hear you’re going through this, Benny. Let’s work out a plan to get you out of the payday loan cycle. Some of the steps will be difficult, but they’ll be worth it!
Understanding payday loans and their costs
Payday loan companies are great at marketing. They try to make it hard to find the true cost of borrowing. And they prey on people who need quick cash by offering same-day loans. This is clear from a survey from the Financial Consumer Agency of Canada, which showed that 43% of respondents were not aware of the costs of a payday loan compared to different short-term lending options.
Payday loans are meant to be short-term solutions. Yet, the high fees and interest rates turn them into long-term problems for the borrowers. The fast cash and instant loans might feel like a lifeline, but the repayment terms are often crippling. They’re one of the most expensive ways to borrow money. For example, a $100 loan could mean paying back $121 in two weeks. That’s a huge total cost compared to the amount borrowed! While paying back an extra $21 might not seem like a lot, the short time period and loan amount add up to an annual percentage rate (APR) of over 540%
These lenders usually don’t check your credit score or credit history when you apply. This often makes them easy to get—even with bad credit. They skip the credit check because they don’t really care about your ability to repay them. They’re counting on you rolling over the loan, which means more profits for them.
Steps to get out of payday loan debt
Be kind to yourself
This may be an unexpected step in the process, but you didn’t intentionally get here. Give yourself grace. You’re obviously ready to get to work to make changes, and that is what is most important!
Assess your loan situation
List all your payday loans, including the lender’s name, the amount you owe, the due date, and the interest rate or fees. Post your list somewhere you will see it. Making the list visible can help you keep your goal of paying your debts top of mind.
Find the gap
Build a budget or review one you already have. Seeing your income and expenses clearly is an essential part of your finances. Understanding the gap that led to you needing your first payday loan is key to getting out. If you don’t see a budget shortfall, think back to what happened when you got your first payday loan. Was it to cover big expenses? Or maybe to cover other debts or payments you had fallen behind on?
Slash all non-essential spending
Cut everything you can! Cut out all non-essentials and look for ways you can reduce essential spending. We need to reduce any spending possible to get away from your payday loans. Making it a challenge you can track can add a little bit of excitement to it. You can also consider different mental tricks or a no-spend period to help you stay on track!
Add extra income
Could you take on some cash jobs for instant cash? Or sell items around your home you aren’t using for quick cash? Consider any skills others would be willing to pay for, like organizing or painting. Do you have an extra room you can rent out? Are there opportunities to make money online through survey sites? Look for ANY opportunities to increase your income. Just keep track of your earnings, especially if you’re working in a way that affects your taxes.
Build a plan
With six payday loans to work on, it’s important to have a plan. I recommend that you focus on paying off the loan with the highest interest rate first, then work your way down. This is the debt avalanche method. Its biggest benefit is that it can save you money on interest. If the fees are similar, consider the snowball method, where you first pay off the smallest loan to help you gain traction on your debts. Beside the list you created in Step 1, record the order in which you plan to pay off your payday loans.
Alternative loans
An installment loan or personal loan will usually have lower interest rates and longer repayment terms. If you can shift the debt to a different lending product, managing the payments could be much easier. If you have bad credit, this will limit your options. You might need a co-signer with good credit for your loan application to qualify. Keep in mind that if you include a co-signer, any missed payments will become the co-signer’s responsibility. There are also loans online that may offer better terms than payday lenders. Be sure to closely review the loan terms if you explore these options.
Seek help from a Credit Counsellor
Non-profit credit counselling agencies can help you create a debt management plan. They can also negotiate with your lenders to reduce your payments or waive some fees. This service is often free or low-cost, and it can provide you with some much-needed breathing room.
Family/friend loan
Mixing money with friends and family can get tricky; don’t let it stop you from exploring this option. If you have loved ones that you feel may be able to help, don’t take this option off the table. A small cash loan from someone who cares about you could be a big help. If you go this route, make it official. Write down the terms and conditions of the loan, including the repayment terms and any interest being charged.
Other options
Consider other lending options, such as debt consolidation loans. Transferring the debts to a credit card or a car title loan could also be helpful if you own your car outright. Be cautious with these options, though. Make sure to read the fine print and understand the total cost over the life of the loan. A consumer proposal or bankruptcy might also be something to consider if you have other debts that are making things tight each month.
Getting out of these payday loans is about taking small, daily steps toward a better financial future. You’ve already taken the first step by reaching out for help, and that’s huge. I’m happy that you did and that I was able to help you understand your options!
Thanks for submitting your question!
Consolidated Credit’s executive director, Jeff Schwartz will review it and give his response here, along with any additional tips that our credit counsellors have to offer. If you need immediate assistance, please call us and a credit counsellor will get you the help you need.
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