Payday loans, also known as cash advance loans, post-dated check loans or deferred deposit loans, can put customers in a bind because of their high fees and short repayment period. Payday loans generally charge around $15 to borrow $100 for two weeks, although the amount varies depending on the state. These fees can get very expensive over the long term, so people having trouble paying their loans should look to other options.
Understand the Cycle
Although the fees when first getting a payday loan might not sound too bad, the problems come when people use a new loan to pay off the old one. This is because the lenders charge fees on each loan. If, for example, someone pays $45 in fees for a two-week loan of $300 and extends this loan every two weeks for a year, this is equivalent to an APR of 390 percent. Consumers who understand the long-term financial implications of this practice are more likely to turn to alternative options than those who do not.
Credit Card
Anybody who has a credit card with available credit should use this instead of a payday loan. Even if the credit card has an APR of 30 percent, this is still exponentially less expensive than a payday loan. Consumers can either use the credit card for everyday purchases, such as groceries, to free up cash to pay off the payday loan, or they can get a cash advance on the card to directly pay off the loan. Cash advances sometimes have higher interest rates than regular purchases. Consumers who use credit cards to break the cycle of payday lending should then focus on paying down the credit card balance with the money they would have spent on payday loan fees.
Get a Different Loan
Consumers can use a personal loan from a credit union or a loan from a friend or family member to pay off the payday loan. For example, if someone has been extending a payday loan of $300 at a cost of $45 every two weeks, he could borrow $300 from a friend to pay off the loan. He could then give the friend seven payments of $45, one every two weeks, to repay the $300 loan. Although this plan will cost the same amount as the payday loan for those 14 weeks, at the end of that time the consumer is out of debt instead of still owing $300 to the payday lender.
Tighten the Budget
Payday lending is often due to people spending slightly beyond their means and falling behind on necessary payments. One solution is to spend less money and gradually reduce the amount of the payday loan. Some simple ideas for tightening a budget include eating at home or packing a lunch instead of eating out, purchasing clothing only when needed and cutting back on phone and cable packages. Consumer credit counseling organizations often offer free or low-cost budgeting assistance to people who need help developing a budget.
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