Trevor* was at the end of his rope. The very, very end of it, in fact. He was in six figures of credit card debt. He wasn’t communicating with his wife at all, and he had exhausted every single financial option available to him. He couldn’t do any more balance transfers, and he couldn’t get approved for any new promotional rate credit cards fast enough to get to his next payday. He was sinking, quickly, and he didn’t know where to turn.
All he cared about was making it to his next paycheck, so he went with the only option left to him and what thousands of people across America do every day: take out a payday loan.
When things are going badly with your finances, it’s difficult to know where to turn. Many people have family or friends they can rely on for help in a financial emergency, but others seek out the “help” of a payday lender. I put “help” in quotation marks for a reason, since payday lenders rarely, if ever, truly benefit the person taking out the loan. Instead payday lenders are known for their sky-high fees and their tendency to trap people in debt who already have serious financial issues.
Trevor was one of those people, but the catch was that he actually had a very high income. Years of spending too much, however, had caught up with him. He was so nervous walking into the doors of the payday loan shop, wondering what the person behind the counter was thinking. She tried to give him a smile to reassure him, but he felt like she was judging him, his high income, and his need for $1,000 right then and right there.
It only took a few minutes, but he walked out of the shop with $1,000 cash in his hand. He felt a wave of relief. Unfortunately, the relief only lasted 10 days. He got his paycheck and went back to the payday loan shop to pay $120 in interest and fees. Of course, his financial situation hadn’t improved so he was left with the same problem. So, he took out another payday loan to get to his next paycheck.
Trevor’s situation is not uncommon. An article in the Washington Post asserts “more than 80 percent of payday loans are rolled over or are followed by another loan within 14 days.” This is because people, like Trevor, can’t afford their expenses, and borrowing money from the next paycheck is only going to help them in the short term. Eventually, they are going to be short on cash again…and again…and again. The process of payday lenders letting borrowers take out a new loan and roll their old one into it creates a deep trap of debt with interest rates that can reach in the three and four figures.
Last month the Consumer Finance Protection Bureau said soon it would propose some restrictions on payday lenders. These restrictions would call for a stricter loan process to ensure borrowers actually have the ability to repay the loans in a reasonable manner.
All of this is good news for the future of an industry that has profited on others’ financial struggles for far too long. However, the best way to avoid the trap that comes with payday loan debt cycles is to not take part in them at all.
I know this is easier said than done for someone who is in a financial pinch, but before you look for a quick fix to your money problems, instead try to utilize one of the options below:
Short-Term Financial Fixes
Use one of these methods if you are in need of a short-term loan right away. This is for those of you who are in such a bad financial position that you are considering a payday loan as a last resort.
1. Borrow money from someone you trust
It’s not easy to ask people to borrow money, but there is a way you could make it official. Instead of just asking to borrow money, actually give your family member or friend a detailed proposal asking for a particular amount, naming an interest rate, and listing out a repayment schedule. Include information about your income and the steps you will take to ensure you can pay your bills in the future. If you approach borrowing from family or friends in this way, it shows you mean business and don’t want to take advantage of them. Rather you want to pay them in interest (just not interest as high as payday lenders!)
2. Credit Union Loans
Credit unions offer loans or a personal line of credit that may help alleviate your financial struggles. Typically credit unions are situated within their communities and understand the people who live there. They will be more willing to work with you on a personal loan if they understand your current struggles.
3. Negotiating with creditors
Don’t always assume that your debt is fixed at a certain number. Anything is negotiable and at some point, people just want to get paid. This is especially true when it comes to healthcare costs, collection agencies and possibly your credit card bills. Stay strong, be firm but friendly when you ask, and you might be surprised at how much money you can save on your total debt repayment.
4. Credit card cash advance
Most credit cards have the ability to give cash advances, and many of them come in the mail with checks. This is definitely a last resort because the interest rates can be extremely high; however, they are not nearly has high as a payday loan interest rates and for that reason, should be considered before a payday loan.
Long Term Financial Fixes
1. Credit Counseling
Getting your finances on track is a very long-term process. I’ve been writing for personal finance blogs for five years now, and I still have months where I totally blow my budget and other months where I’m right on track. So, just because you’re not in the best financial shape of your life doesn’t mean you never will be. Start with non-profit credit counseling if you have a lot of debt and work towards trying to get out of it. Slowly but surely make your way to the finish line with the help of some professionals.
Budgeting is a great habit to start whether alongside credit counseling or just on its own. There are many different ways to budget, but essentially, it’s best to give each dollar a place in your budget. I like creating a budget at the beginning of the month and checking in once a week to see how things are going. That way, if I fell off the wagon and ordered too much pizza, I can do better in the weeks going forward. Budgeting will also help you realize your weak areas so you’re always aware of them. It will also help you to see which expenses might not be necessary so that you can continue to reduce them and throw that money at debt repayment instead.
3. Tracking Expenses
When you are trying to get out of debt, tracking expenses is a very difficult but effective habit to start. When you have to write down everything you spend, you are much more likely to avoid spending at all. This will help with sticking to a budget, which will in turn help with minimizing expenses and paying off debt.
You Can Break the Debt Cycle
Trevor’s story has a happy ending. He admitted that there was no way to get out of the payday loan debt on his own. He ended up borrowing the money from a family member who they paid back over time without interest. Fed up with his situation, he enrolled in credit counseling to get help. It took several months but by making massive changes to his lifestyle and large payments each month, he successfully paid off over $100,000 in debt and has been debt free ever since.
So, it is definitely possible to become financially savvy in the future even if you find yourself in debt and struggling right now. With just a few adjustments, a bit of knowledge, and a lot of support, you can definitely turn your financial life around. The way to do it, though, is through budgeting, expense tracking, smart borrowing and not payday loans.
*Names have been changed.
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