Payday loans are short-term high-interest loans that do not require a credit check. They are very expensive and, thus, should only be used in true emergencies. However, for many people, payday loans are a part of daily living. There is never enough money at the end of the month, so they turn to payday lenders to get through the last few days.
But what happens if you can’t pay back the loan on time? The debt starts growing at an alarming rate. The lenders are well aware of their customers’ financial circumstances. They’re happy to allow for flexibility in paying back the loans. This isn’t generosity, it’s business. The flexibility comes at a very high price. The APR on payday loans can be as high as 1,000%, compared to a typical 7% on a standard bank loan.
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Mike’s payday loan story
Mike is a self-employed roofer. He uses his truck to get from job to job. Without it, he can’t work. One day the truck broke down. Mike didn’t have the $500 to pay for repairs. He was expecting payment from a customer, so he borrowed the money from a payday lender, intending to pay it back in a week. He wrote out a check to the lender for $500, plus a $75 fee, the equivalent of 780% APR. He then used the money to fix the truck.
Unfortunately, there was a problem with the payment. Mike’s customer had gone out of business and declared bankruptcy. He couldn’t pay Mike for the work, so Mike couldn’t pay back the loan. He asked the lender for a two-week extension. The lender obliged, but demanded another $100 on top of what Mike already owed. Having little choice, Mike agreed to the terms.
In the meantime, the economy went downhill. The housing market cooled, and Mike’s jobs dried up. He had no way to pay back the loan. Week after week, his debt grew. Pretty soon, Mike was $3,000 in debt over a $500-loan. He stopped answering the phone, just in case it was the lender calling to collect his money. He couldn’t sleep, and, worst of all, he couldn’t work.
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How to get out of the payday loan cycle
Fortunately, there is a way out of payday loan cycle. The most important thing is to reduce the interest on your loan to stop your debt from growing at an astronomical rate. The best way to do this is through debt consolidation.
With debt consolidation, you take out a new low-interest loan and use that money to pay back the payday lender as soon as possible. The APR on a debt-consolidation loan is a fraction of what the payday lenders charge. Plus, you don’t have to worry about threatening debt collection agencies calling you day and night or knocking on your door.
If your debt is getting out of control, why not fill in the form above to find out how debt consolidation can help you get out of payday loan hell.
States that have banned payday loans:
District of Columbia