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Trapped in Payday Loan Debt? Here’s How to Escape

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Twelve million Americans turn to payday loans every year, spending $9 billion on loan fees, according to a recent report by the Pew Charitable Trusts, because few of these loans are paid off by their due date. In fact, the Consumer Financial Protection Bureau notes more than 60% of borrowers end up trapped in payday loan debt, rolling over the loan so many times that they end up paying more in fees than their initial loan amount.

If this scenario sounds all-too-familiar to you, there are a number of strategies that can help you break the payday loan cycle.

Extended Payment Plans

Extended payment plans allow borrowers to pay back the loan in installments for a longer period than their original loan agreement. Setting up an extended payment plan plan involves contacting the payday lender to work out an arrangement. While setting up the plan doesn’t typically involve a fee, defaulting on the payment plan can come with fees and penalties.

Contact State Regulators  

If payday lenders refuse to work with you on an extended payment plan for your debt, contacting the agency that regulates lenders in your specific state could be helpful. State regulators may be able to help negotiate a payment plan with licensed lenders of payday loans. They may also take action against unlicensed lenders of payday loans.  

File a Complaint

Filing a formal complaint against the payday lending company if it refuses to work with you on a payment plan creates an official record of the situation. Complaints can be filed with state regulators as well as on a national level with the Consumer Financial Protection Bureau.

Find an Alternative Lending Source

Payday loans can be paid back from money borrowed from a different source, such as a credit union or family member. Alternatives to payday loans don’t erase the debt, but they may have more agreeable terms and interest rates. A variety of different loans are available for numerous financial scenarios. One could be useful in helping you escape the payday loan trap if your credit qualifies you.

Credit Counseling

Credit counseling aims to help consumers better manage their finances, and a number of reputable organizations exist across the country. Services can include help with payday loan debts, budget creation and money management. Credit counseling is usually offered by many nonprofit organizations.

Credit counseling won’t erase your debt, but it can provide ongoing strategies for better management of it. Not every credit counseling organization is reputable, however, so it’s important to do your research when investigating this option.

Debt Management Plans

A Debt Management Plan (DMP) is a debt-relief option offered through debt counseling agencies and debt management companies. They work with your creditors to come up with a monthly payment solution that works for your situation. Each month, you’ll deposit money into an account with the agency, which is then used to pay off your bills.

Making regular payments is a must, and consumers must refrain from using credit cards while in the program. The Federal Trade Commission (FTC) urges consumers to carefully review DMP terms and ensure creditors are willing to work within its confines before jumping in. Keep in mind this isn’t a quick fix. Paying off debt through a DMP can take years depending on how much debt you have.

Debt Settlement Programs

Debt settlement programs are generally set up by for-profit organizations, which negotiate with creditors on your behalf to pay a “settlement.” This settlement consists of a lump sum of money that is less than the full amount owed. Debt settlement programs require you dedicate a certain amount of money each month to paying into the settlement, until the full amount is reached.

If you’re considering this option, be sure to do your homework and ask a lot of questions (here’s a guide to some of the questions you should ask a debt settlement company).

Bankruptcy

Filing for personal bankruptcy may be an option if your debt is completely out of control, but keep in mind that it comes with some serious consequences. While bankruptcy may help you escape payday loans and other debts owed, it also means a huge blemish on your credit reports for up to 10 years. That can result in you being denied future credit, mortgages and other financial opportunities. It can even make things like auto insurance more expensive. That’s why it’s best to exhaust all other possible options before making this choice.


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