money jar

Getting into a payday loan trap is easy —the payday loan companies make it easy to get a loan until payday but the problem is, you can become ensnared in a web that feels all but impossible to escape.  How do you get payday loans paid off so you can free up more of your own income? It’s not easy once you’re ensnared but it is possible and the sooner you do it, the more money you’ll have to live on!

How payday loans work

Basically, you can borrow money against a future pay. The interest rate tends to be quite high. (Many payday advance companies have interest rates so high that it seems as if it’s ‘legal’ loansharking!). When your payday comes around, you can either pay the loan off and walk away, OR (here’s the dangerous part) you can pay just the interest on that loan to carry the loan forward. That’s where the trap happens because it’s much easier to just pay the interest and continue the loan.

Because the interest rates are typically so high, you leave yourself short if you pay off the loan. It’s far too easy to  take the easier route and pay interest and plan to pay it off ‘next’ pay.  Next pay turns into the pay after that and the pay after that and before you know it …it’s months later and you’re still running to the loan place each pay to hand them a sizable chunk of your money.

Multiple Payday Advance Dangers

The above scenario happens a lot. That’s what many payday loan places are hoping for because it’s much more profitable for them if you continue to pay them interest every two weeks rather than pay back your original loan.  And because so many of these places are out there, it is easy to carry multiple payday loans at a time. Why does that happen? Many find it so difficult to keep paying that interest payment every pay that their cash flow dwindles and they become even more strapped for cash so they feel powerless to do anything but take on an additional loan. Before you know…it you could be paying off hundreds a month and running around town every pay day juggling things to keep it together.

Here’s a pay scenario:

Ms Jones borrows $800 from the local payday advance store for 2 weeks. At the end of two weeks, she pays them $130 in interest to keep the loan going. It’s either that or give them $930 —which would wipe out more than 2/3 of her paycheck. She does this again two weeks later and is really having trouble making ends meet. So she runs to the payday place two blocks away (or finds an instant online payday place that pays instantly via PayPal) and borrows $600 so she can make rent.

In two weeks she owes them $700 so instead she pays them $100 to keep that payment going for another two weeks.   Now, every two weeks she’s paying out $230.00. That’s $460 a month of her hard earned money that she’s just giving away.

How to escape the payday loan treadmill

If you’re running and running but never reaching a destination, you need to do something drastic — and quick! Here are some suggestions:

• Let the payday loan companies know you can’t continue the loan. You might have to open a different bank account and move your paycheck there. Some of them will put you on a payment plan. And this might hurt your credit rating but the temporary issue might be all you can do. When you get them paid off, don’t ever borrow another advance again.  Many won’t do a payment plan that doesn’t involve interest and penalties so this might not be the best option for everyone, depending on where you live and what your contract states.
• Bite the bullet, so to speak, and live in poverty for 2 weeks. Pay your full loan off and just suffer through being really poor for a few weeks. Live on Ramen noodles, leftovers in your freezer, and just get through it until next payday. It’s going to be tough, but to free up hundreds of dollars a month in interest fees will set you free!

These payday advance companies look like they exist to get you out of a jam but in reality, they’re happiest when you’re on that treadmill, paying them money every two weeks for the rest of your life. Many will offer loans to seniors on a fixed income or people on a disability pension. How on earth are those people going to get out of the trap? The temporary break typically only lasts a brief moment before the reality of mounting debts and incredibly high interest rates set in. These loans are designed to get you out of a quick jam but the ulterior motive is to fleece you for as much of your hard earned money as possible. If you’ve never had a payday loan….find another way to get out of that jam.

Other tips: Start budgeting for a rainy day as soon as possible and setting money aside for unexpected expenses. Live on cash instead of credit and you will eventually be financially secure. Delve deeper into this blog and check out the money jar budget system. It’s a great way to help get out of debt and put money away for the future.