The first time you took out a payday loan, you were likely strapped for cash. These small loans can be a godsend to people in need of some breathing room, but they can quickly spiral out of control when borrowers fail to pay them back promptly. Use these five tips to avoid falling into the all-too-common payday loan trap:
Know How Much You’re Actually Paying
Emergencies happen, and if you need money to survive, a payday loan is the right choice if your home, health, or family is at risk. However, it should be your choice of last resort. Try selling assets like secondary vehicles, electronics, or jewelry to raise funds first.
In the United States, the average payday loan is for a mere $375 but ends up costing an additional $520 in fees — an effective interest rate of 139 percent over the loan’s duration! Borrowers typically repay loans off within a few months, so most payday loans have annual interest rates of 300 percent or higher. No other type of debt comes close.
Set Financial Goals and Meet Them
People borrow when they don’t have enough money in their bank accounts, and you can avoid this situation simply by preparing ahead of time. Many financial planners advise setting aside enough money to cover six months of living expenses, but every little bit counts. Whether you save $500 or $20,000, an emergency fund can help you weather financial storms without taking out loans.
Start Shrinking Your Payday Loans
A payday loan trap is a scary place to be — you need to take out additional loans simply to repay your current loans. Once you start to fall behind in interest and fee payments, your financial situation goes from bad to dire. You can get ahead by shrinking your loan amount each week. If you currently borrow $500 at a time, try shrinking that amount by just $10 a week. As your loans shrink, you’ll pay far less in interest and fees, and you’ll be able to pay down your loans faster and faster.
Sit Down and Talk with Your Creditors
Creditors have a dismal reputation. Most people assume they’re mean and out to make their lives miserable. Keep in mind that they just want to recoup the money they’ve lent you, and many creditors will be more than happy to renegotiate your loan or set up a payment plan to help you get back on track.
Unless your credit is rock bottom, you can likely take out a small secured loan from your local credit union or bank by using your vehicle or house as collateral. These loans typically have low fees and extremely low interest rates compared to payday loans. Instead of taking out a payday loan for $500, take out a secured loan for $2,000. Pay off your payday loan, and put the extra money in a savings account. Your monthly payments will be extremely low, and you’ll immediately find yourself back on the path to financial freedom!