Managing Debt

Trapped in Payday Loan Debt? How to Escape

Comments 2 Comments

“Is it possible to get ahead of the payday loans and get credit back in good standing?” That question was posed to us in a recent CreditExperts Twitter chat we hosted. If you’ve ever been stuck in the cycle of payday lending you may be wondering the same thing.

The answer depends in large part on where you took out the loan.

If you borrowed from a lender who is a member of the Consumer Financial Services Association of America (CFSA) then you may be in luck. CFSA’s Best Practices guidelines allow a payday loan customer the option of entering into an Extended Payment Plan (EPP). With an EPP, you’ll have more time to repay the loan (usually four extra pay periods) without any additional fees or interest added for that service, and you won’t be turned over to collections as long as you don’t default on the EPP. (Note: Laws governing payday loans vary from state to state.)

However, to qualify, you must apply for the EPP no later than the last business day before the loan is due, and you must sign a new agreement. If you took out your loan through a storefront location, you’ll have to go back to that location to turn in your application. Amy Cantu, director of communications for CFSA, says that their association represents almost 9,000 storefront payday lenders in the U.S. “Some of our members do offer online loans, as well,” she notes.

In some states, EPPs are mandated under state law.

[Related Article: The First Thing You Must Do Before Paying Off Debt]

Where to Go After EPP

If an EPP isn’t an option, you may want to talk with a credit counseling agency. While credit counseling agencies help consumers in debt all day long, these kinds of loans can present unique challenges. “It’s not a traditional loan with set guidelines in terms of how they work with us,” explains Thomas Fox, community outreach director for Cambridge Credit Counseling.

He says that lenders who are members of the CFSA “seem to be more lenient” and are “more apt to try to work with people.” Those lenders will often “restructure to pay back (the balance) over 6-12 months when coming through our program.” But he also adds that only applies in about 40-50% of the payday debt situations with which clients are dealing. With the rest, he said, their agency will do their best to assist. Sometimes that means negotiating settlement of the debt and sometimes it just means reducing payments on other debts or finding more money in the budget so the payday loan can be paid off.

But some consumers with these types of loans just get themselves deeper into debt.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

The snowball effect

Just 14 percent of payday loan borrowers can afford to repay the average payday loan, according to research by the Pew Charitable Trusts. In its report, How Borrowers Choose and Repay Payday Loans, it found that “the average borrower can afford to pay $50 per two weeks to a payday lender — similar to the fee for renewing a typical payday or bank deposit advance loan –but only 14 percent can afford the more than $400 needed to pay off the full amount of these non-amortizing loans.”

It went on to warn that “administrative data show that 76 percent of loans are renewals or quick re-borrows while loan loss rates are only 3 percent.” Fox agrees these loans may pile up when consumers fall behind. “We’ve seen people with 5 – 7 payday loans from the original loan. It’s loans stacked on top of a loan,” he notes.

And that’s also why for some borrowers the only other option to get out from under this kind of debt will be bankruptcy. “For the most part, payday loans aren’t treated any differently in bankruptcy than any other unsecured loan,” writes attorney Dana Wilkinson on the Bankruptcy Law Network blog.

Some consumers, however, have the mistaken impression that they can’t include payday loans in their bankruptcy. Or they worry they will be charged with fraud or arrested if they can’t pay one of these loans back or try to discharge them. One of the reasons that fear is so common is that payday loan debt collection scammers often make those kinds of threats, despite the fact that these actions are illegal.

Are you trapped in payday loan debt? Or have you found your way out? Share your story in the comments below.

[Featured Products: Research and compare loans at Credit.com]

Image: Ingram Publishing

  • TERRY C STOVALL

    Hello Gerri,How are you feeling this afternoon? Great I hope. I am feeling okay so far. Listen to this if I may request that if you/your organization would provide me with some items or materials on how to stop these payday loans scammers from making harassment phone calls to my place of employment and my personal/work related references as well. Are there any books to help me and other people as well?.Thanks.

  • http://www.credit.com/ Credit.com Credit Experts

    Hi, R.W. –
    We can’t provide individual counseling, but we can point you to resources to help you find the help you need. Here’s a post on how to find a credit counselor.
    How to Choose a Credit Counselor.
    Good luck to you.

Find out where you stand.
Get your FREE personalized credit report card.

Sign Up Now
X

Stay connected to our experts

Please submit your email address to get credit & money tips & advice
from our team of 30+ experts, delivered weekly to your inbox.