Getting Out from Under Payday Loans

by Gary Foreman

Getting Out from Under Payday Loans photo

Getting out from under payday loans can feel like trying to get out of quicksand. Hopefully these tools can help you keep from drowning in payday debt.

Gary,
I’m in need of some money and cannot get a loan. I have several payday loans that I cannot get paid off. I’ve been trying for several years and I only have enough money to renew.

If I cash out my 401k to pay these loans off, I will have plenty of money each month to put back in my 401k plan. Will I still face the extra 20% penalty at tax time?

I’ve learned my lesson and I will never get mixed up with paydays again. I think they should be outlawed.
Michelle

They’re also known as cash advance loans, check advance loans, post dated check loans or deferred deposit check loans. The Federal Trade Commission has called them “costly cash.” There are over 10,000 payday loan “stores” operating and it’s estimated that they collect over $2 billion a year in fees and interest.

Payday loans make it too easy to borrow.

Typically the borrower, in this case Michelle, would write a check for the amount of the loan that she wants plus a fee. The size of the fee is based on how much money she’s borrowing. The lender agrees to hold the check for one or two weeks. Typically until Michelle’s next payday.

At that time Michelle can come in with cash to “redeem” the check, she can let the lender deposit the check or she can “roll-over” the loan until her next paycheck. If Michelle chooses to roll the loan, she’ll incur another fee.

Payday lenders have the upper hand in collecting.

If Michelle can’t redeem the loan or refuses to roll it, she’ll be informed that they’ll deposit her bad check. If it bounces, she’ll face criminal charges of intentionally writing bad checks. Not to mention bounced check charges from her bank.

Many payday lenders don’t want Michelle to know how much she’s paying. A Public Interest Research Groups survey found that only 37% of the lenders quoted an accurate Annual Percentage Rate even though the federal Truth In Lending Act requires it.

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“Usury” laws govern most payday loans.

Those laws limit the amount of interest that can be charged on a loan. The PIRG survey of payday lenders found interest rates that ranged from 390% to 871%. The average APR was 474%! The same study showed that in one state 77% of the loans were roll-overs.

What are your options for getting out from under payday loans?

Presumably, Michelle wouldn’t be taking a payday loan if she could have gotten the money somewhere else. She would have paid less interest by using a credit card cash advance or borrowing from friends or family. A cash advance on a credit card would cost Michelle between 35% and 50%.

A 401k loan

She’s considering taking money from her 401k plan. Any withdrawal will be subject to a 10% penalty and will be added to her taxable income for the year. So she’ll probably lose 20% of the withdrawal to the federal government. But that’s better than paying 400% APR.

Michelle may have a better choice. Borrowing from her 401k plan would provide the money she needs now and allow her to pay it back through payroll deduction. She should speak with the human resources department to find out the details about a 401k loan. The biggest advantage is that money borrowed is not subject to tax penalties or added to her income for tax purposes unless she doesn’t repay it.

Overdraft protection

Other options that don’t involve her 401k should also be considered. If she’s eligible for overdraft protection at her bank, she may want to sign up. The bank fees would be less expensive.

A credit card cash advance

Payday loan companies have sprung up primarily to serve clients who don’t qualify for a credit card. If Michelle is among this group, she should check her credit report for errors. Roughly one in four reports contain a significant error. A corrected credit report might qualify her for a credit card and cash advance privileges.

Get payments reduced

If Michelle has other monthly payments, she might be able to have one or more of them either reduced or delayed. A call to the creditor might be all it takes.

Seek professional debt help

Another alternative, if she has other debts, would be to see if credit counseling or debt consolidation would work for her. Either could reduce her regular payments and free up some money to pay off the payday loan.

Cut  expenses

Finally, Michelle should cut any expenses that aren’t absolutely necessary. This is a time for drastic measures.

Get proactive about tackling your debt.

Get the book How to Conquer Your Debt No Matter How Much You Have and begin the journey to financial freedom today!

Michelle is in a tough spot. She needs to get these loans paid off before they force her into bankruptcy. Hopefully, one of these tools will help her dig out of debt.

Reviewed May 2021

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. You can read Gary's full bio here. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews.

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