Loan Sharks Problems? Escape the Payday Loan Cycle for Good!
If you are already in the situation where you are living from paycheck to paycheck, then it might be tempting for you to go to the local payday loan store whenever a financial emergency comes up. Once you start this habit, however, it can be hard to get out of the vicious cycle of borrowing to make ends meet. If you want to break free from the perpetual circumstance of never enough, there is hope. With a little determination and resolve, you can break the cycle of payday loan store dependency for good. At the heart of the matter you will need to become a better budget and saver. Let’s talk about a few ways that you can create a buffer and your life with money so that you don’t have to depend on payday loan store.
# 1 Are You Cashflow Negative (or Just a Sloppy Spender?)
Cashflow negative, means that your expenses actually exceed your income. Sometimes this happens because you don’t make enough money for the month. Other times this happens because you spend too much money. Either way, find out what the issue is by creating a list of expenses and income and diagnosing the problem.
#2 Cut Expenses
If you are not cash flow negative and you find that you are just overspending then you are actually in a good place. Your situation will not be that incredibly difficult to fix at all. After you write down all of your expenses and subtract them from your income, now zero-in on finding the excess. (You know, stuff you can do without.)So for example, if you find that you eat out 5 times a month at $200 total, perhaps bring that down to only $50 dollars a month. I talk a lot about expense cutting on this blog as well but you can search around the personal finance blogosphere and Google good ways to cut expenses. This will be a powerful tool in getting you away from the payday loan sharks.
#3 Add Extra Income
If you take a moment and think, you can probably come up with a few ways that you can earn money. There are now a number of sites out there for freelancers who have extra capacity and are looking for work. Take a look at some sites like Fiverr.com or UpWork.com to see if there are people looking for your skills. Even if you feel like you don’t have any skills, research to see what people are hiring for and choose something with a low learning curve to get started. There is something for everyone. People pay this guy to stand in line for them! If you can’t think of anything you can do, check out my most popular post- 19 Reasons You Should Never be Broke.
#3 Create a Safety Net
Once you get a good combination of expense cutting an extra income in place, don’t forget to apply the different to your emergency savings account! This fund will be the crucial difference in whether you go to a payday loan store or not. If you don’t feel like you have enough time or are not yet disciplined enough to save on a regular basis, check out free savings services like Digit which works on mobile devices and helps you save in small chunks. This might not be the preferred method for saving because you want to be used budgeting but it is a start. Also make sure that you have an emergency savings account that is not easily accessed. We like online banks like Ally.com and Capital360. They’re online so the costs are low (no brick and mortar branches so they pass the savings to you in low to no fees and better interest rates.) Plus your money is not easy to access your unless, of course, you have a connected debit card (which I don’t recommend.)
#5 Negotiate Grace with You Creditors
Don’t be afraid of asking other creditors for grace for a particular bill. Payday lenders are predatory in nature and notoriously difficult to negotiate with. For this reason, you’ll probably have more success trying to negotiate with the electric company, your cell phone service provider or other utilities if you can. If you can buy some time with other bills, then you can avoid the payday loan store much easier.
#6 Consult with Advocacy Organizations
There are law firms and government sponsored organizations that may be able to help you if you are stuck in the payday lending cycle. If there are some questionable activities on the side of the lender, they might be able to help. However, don’t depend on this method to save you! The chances of the payday lender allowing you to escape your debt obligation is very slim. The loan contracts are typically very airtight with lots of lobbying power behind them.
Quick Facts about Payday Loans:
Average Interest Rate: 455%
Average loan: $300-400
Average number of loans per borrower: 9/year
Payday loans/year in US: $30 billion
Payday loan stores in US: 22,300
Source: Center for Responsible Lending, Advance America and QC Holdings 2009 10-Ks
What else can you do to get out of the payday loan cycle?
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I would strongly suggest that anyone who is in a financial position where they “need” a pay day loaner should first try to get a couple of credit cards. I know, I know, credit cards are bad, etc. etc., but at 7% interest they are a much better option than pay day loans, and credit card companies tend to function much like other creditors and not in a hugely predatory manner (e.g. if you fall behind you can call and negotiate with them easier). Yes, absolutely, not taking out debt in the first place is best; and credit cards should never be treated like “free” or “extra” money; but if you’re in the position of needing a loan, try everything else before you try a pay day loaner. Once you start it’s incredibly hard to stop – pay day loaners tend to suck you in with one loan and then when you can’t meet their exorbitant interest rates “Hey, don’t worry about it, just take out another loan.” I was reading an article earlier today on Propublica where someone took out a $1000 loan that ballooned into $40,000. She would’ve been much better off putting that $1000 on a credit card than relying on a loan shark!
I would say that the most ideal situation here would be to build up cash. Getting a credit card would still aggravate the situations. Most times, there will not be a 7% APR for someone stuck in the payday loan cycle. I’m guessing they would have typical subprime rates available to them.
I have a feeling that this problem is something that is growing more and more popular in middle-income families. I like that your post draws attention to the fact that it does very easily turn into a terribly viscious cycle that can ultimately cost a small fortune. However, I don’t think your plan is really much of a plan to get out of the cycle but more so how to avoid it. I am interested to know if anyone has actually ever concocted and executed a legitimate action plan to get out of the payday loan cycle. A plan that would realistically be feasible for the type of families who are most likely to be in the situation in the first place.
Hi, Toni. I think this post helps with avoiding the trap AND getting you out for good. For example. Say you have a $2,000 payday loan. That you renew every month. Someone could make the decision to stop the cycle by using, say, an income tax refund check or selling something to get out of that loan. Then they would be in the position to start these steps. I believe it’s possible. Just like getting out of any type of debt, you have to start with a commitment and a plan. Thanks for stopping by!