Avoid the trap of high interest payday loan consolidation with these alternatives to debt

For the more than 12 million Americans who take out payday loans each year, the debt doesn’t end with their next paycheck. In fact, data from the Consumer Finance Protection Bureau shows that over 80% of payday loan consolidation are renewed within 14 days and the majority of these subsequent loans are for amounts equal to or greater than the original. This is because these loans often charge exorbitant interest rates, plunging borrowers into a vicious cycle of interest payments and poverty. And if you don’t pay them back, there can be serious financial consequences.

There are options to evade predatory lenders and take back control of your financial life.

Alternatives to a payday loan

Before taking out a payday loan, you should exhaust all available options, such as requesting an advance from your employer, borrowing money from friends or family, or selling unused items. But be aware that there are also other borrowing options with lower interest rates and fees that may be available to you.

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Personal loans, such as those offered by your bank, credit union, or online lenders, are typically repaid over two to three years, with interest rates based on your credit history, but typically at 36% or less. The amount of a personal loan can vary, but can range from around $ 800 to $ 30,000. If used wisely, a personal loan can increase credit and help you consolidate other higher interest debt, such as credit cards. On the other hand, if you already have debt problems, personal loans can add to your problems. Still, they are a better choice than payday loans, which can have interest rates of up to 400%.

Alternative payday loans, which can be offered by credit unions to their clients, tend to have interest rates well below 20% and offer a total loan amount typically less than $ 800.

Finally, if you still have an available line of credit, it’s best to use an existing credit card. Even with an interest rate of up to 36%, this is much better than a personal loan.

How to manage an existing payday loan

If you’re already tied for a payday loan, understand your options.

In many states, an extended payment plan may be available, allowing you to make lower monthly payments. However, this type of plan does not exist in all states, so ask your lender if this option exists in your area. Plus, the extended payment plan can usually only be used once a year, which means you shouldn’t expect to roll over loans and still get extended repayment.

Second, if you have access to any of the loan alternatives listed above, you can consolidate your payday loan into a credit card, credit union loan, or personal loan at a lower interest rate.

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Third, try to negotiate a direct solution with your lender, and if that is not possible, you can file a complaint with the state regulator or the Consumer Financial Protection Bureau. While lenders are not required to respond, state regulators or the CFPB may be able to provide you with valuable information to negotiate your situation.

You can also ask to work with a debt management plan. These are credit counseling agencies that try to negotiate lower interest rates with your lenders, thereby reducing the total amount of interest you pay. In turn, you send the credit counseling agency a one-time monthly payment which they in turn use to pay off your debts. However, working with a debt management plan may require you to stop using credit cards during the program and may affect your credit. These agencies may also charge a monthly fee of around $ 25 to $ 75, as well as a fee for setting up the plan. However, the initial assessment session is usually free and worth continuing, if only to better understand your options.

Likewise, declaring bankruptcy can eliminate almost all debt (with a few notable exceptions, such as student loans), but it will have long-term consequences on your credit. While bankruptcy is rarely a good thing, it can offer a definitive exit for borrowers trapped in a never-ending cycle of high-interest debt and worsening financial options.

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