Payday Loan Consolidation & Relief

A payday loan can seem to be a godsend to an individual who needs cash quickly. The lender will deposit the money directly into your bank account. Even if you have bad credit, your chances of getting your loan approved are high. In most instances, all that you need is a bank account and a regular source of income.

Payday loan companies are willing to advance cash to borrowers who would find it difficult to raise funds from traditional sources. You may not be able to get approval for a new credit card or an auto loan, but it’s entirely possible that the payday loan company will approve your loan application.

However, there’s a catch. The ease with which you can raise money comes at a price. The average cost of a payday loan is 400% per year. Some companies charge rates that are substantially higher. Here’s a map that shows the interest you could be paying in the different states.

Interest rates for payday loans

Source – CNBC

The problem with paying such high interest rates is that it’s very difficult to repay your loan because the interest component adds up to a substantial sum. If you borrow $500 at an annual percentage rate (APR) of 391%, you will have to pay the lender $575 two weeks later. There’s another issue with these loans. Unlike other forms of borrowing, the entire sum in a payday loan is required to be repaid within a short period. Typically, that’s two weeks from the day you take the loan, or your next pay day.

Unfortunately, most payday loan borrowers can’t meet their repayment commitment. According to data collected by the Consumer Financial Protection Bureau (CFPB), a United States government agency that works towards consumer protection in the financial sector, 80% of payday loans are taken out within two weeks of repaying an earlier payday loan.

So, if you do borrow from a payday lender, it’s highly likely that you will get caught in a debt cycle. The Pew Charitable Trusts, an independent non-profit organization, says that the average payday loan borrower spends $520 in fees to borrow a sum of $375 repeatedly.

What can you do if you are caught in the vicious debt cycle of a payday loan? Here are four steps that may help you to escape.

Make a plan to repay all your loans

The first step that you must take is to make a list of your loans. Repaying the payday loan will probably be your top priority because it is due within the next two weeks or less. But it is a mistake to ignore your other debts.

You could be carrying an auto loan, credit card debt, and some other form of borrowing as well. These won’t go away if you ignore them.

Write down the sums that you owe and the interest rate that you are paying on each. This will help you to bring your financial position into perspective and tell you what you are up against.

Consider taking a new loan to pay off all your debt

Now, that may seem counter-intuitive. When you are already struggling to meet your repayment obligations, why should you take on another loan?

However, paying off all your loans by consolidating your debt can carry several benefits:

• You won’t have to worry about making multiple payments every month. Your new loan will carry a single monthly payment.
• You could save a large sum on interest costs. Although your new loan is bound to be expensive, it’s likely that the APR it carries will be significantly less than the rate of your payday loan.
• With only one loan to worry about, it will be far easier to keep track of your financial position.

Stop the lender from taking money directly out of your bank account

When you borrow from a payday lender, you would probably be required to provide direct electronic access to your checking account. This will give the lender the right to take money out of your account on the day that you get paid.

But did you know that it’s possible to stop the lender from taking money out of your account? You can revoke the payment authorization, which is sometimes called an ACH authorization, by writing to the payday lender as well as your bank or credit union.

Even if you haven’t written these letters, you can give your bank a “stop payment order.” This will ensure that money is not taken out of your account.

Change your spending habits

It’s critical that you spend some time to think about the circumstances that led you to borrow from a payday lender. According to Pew’s research, 69% of the individuals who borrow from payday lenders use the money for recurring expenses like paying for utilities, credit card bills, rent, mortgage payments, or food. Only 16% need the cash for emergencies.

The Pew report makes another interesting point. When borrowers were asked what they would have done if they needed cash but didn’t have access to a payday loan, over 80% said that they would have cut down on expenses.

That’s something which you need to consider after you repay your payday loan. Which are the expenses that you can eliminate or reduce? Lowering your expenditure will help you to regain control of your finances, and stay away from high-interest sources of funds like payday loans.

The bottom line

If you find yourself in a payday loan debt cycle, it isn’t easy to escape. But when you do manage to repay the lender, you should ensure that you stay away from this form of borrowing.

Another step that you must take is to start rebuilding your credit. An excellent way to make a beginning is to get a secured credit card. This will require you to make a deposit with the bank. Typically, your credit limit will be equal to this sum. Using this card regularly and paying your complete balance every month will help you to increase your credit score.

After some time, you could be eligible for an unsecured credit card. This will provide you with a source of funds and help you to stay away from payday loans.

Showing that you can use credit responsibly can play a significant role in improving your credit score. This applies doubly when you’ve run into financial problems in the past, such as racking up credit card debt or payday loans and later consolidating them. You want to show that you’re capable of doing better, but your options may be limited.

Making timely payments on a credit card, utility bill, or loan will show up on your credit report and be reflected in your score. Payment history actually makes up 35% of your score, more than anything else does. So, just paying on time can immensely change things.

This is why secured credit cards are such an excellent option. They are a limited option when compared to a traditional credit card, but they are far easier to qualify for when you have bad credit. In fact, there are tons of secured credit cards to choose from so not having one might be the worse option.

What Does Secured Mean

A secured credit card is what you might think of as a combination credit card and debit card. With a traditional credit card, you are approved for a certain amount based on your credit history. A secured card is different. Instead, you deposit a certain amount of money, and that becomes your credit limit. So, if you sign up and deposit $250, you’ll have access to $250 to use on the card.

The deposits are what make these cards available to many people, even those who may not qualify for a typical credit card. Because the lender has your deposit as collateral, the lender is taking on less risk. If you then don’t pay a payment, the payment can be taken out of your deposit, so they will still get paid.

However, most secured credit cards do not have the same benefits and rewards that a regular credit card has. Their reason for being available is to help you clean up your credit.

If you are thinking about using a secured credit card to improve your credit score, there are a few things to keep in mind.

Make Your Payments on Time

A secured credit card can assist in improving your credit scores by allowing you a chance to show that you can responsibly manage credit. When you make all payments on time, this helps you start building a positive payment history. After a certain amount of time proving yourself, lenders may be open to the option of converting your secured card into a traditional credit card.

Of course, the rate at which you see change will vary. If you are using this as your first ever credit account, it will quickly establish history. If you have had credit difficulties in the past, it will take more time. Things like collection accounts, bankruptcy, and delinquencies will make the rate of improvement take longer. However, it is still worth the option as, over time, it will make changes.

Keep a Reasonable Credit Utilization

Just because you have a card with a certain credit limit, that doesn’t mean that you should spend every cent of it. In fact, it’s better to spend less. The percentage of your credit limit that you are using has an impact on your credit scores, as well.

On average, financial experts say that you should use no more than 30 to 35% of your available credit. However, if you are recovering from a painful financial past, it might be best suggested to go even lower and keep it at 10 to 15%. This ensures you don’t overspend and end up with a higher than average utilization.

People who have high credit scores and strong financial discipline can spend more on their credit cards and then pay the entire balance before any interest comes due. They never spend more on the card than is available in their bank account. Instead, they use the card to get points and keep their credit rating high.

However, this is something that may not possible for you right now. In the meantime, just make educated decisions and keep utilization low for that credit bump you want to see. That’s the most important thing to do at this stage of the process.

Ensure Payments are Reported

Your credit score is built around the information found in your credit report. When you take out a new loan, are sent to collections, or miss a payment, that gets reported. The bills that you pay on time or credit cards you pay off completely also get reported.

If your secured card does not report to the credit bureaus, it doesn’t matter how well you do with payments and credit utilization. None of it will be on your credit report, so none of it will lead to positive changes with your credit score. This is why it’s so important to be sure that your secured account is reported to at least one, but preferably all three, credit reporting companies.

And just in case you considered it, this doesn’t really work the other way around. Late payments may not be reported at first, but when a delinquent account goes too far and hits collection, you can count on it reaching your credit score. This will end up hurting your credit score even more than it was to begin with.

Bearing that in mind, secured credit cards are an excellent tool for fixing a credit score that is less than perfect, and are better options than payday loans or other choices available. Just remember that these credit cards are only tools. The user will still need to make sound decisions to improve their credit. It takes time and effort, but it’s an option that is great to begin with when in a position to do so.