Is it possible to end the payday cycle and get your credit back in good standing?
Unfortunately, this is a question many people are asking.
The trap begins innocently enough. You’re short on cash, you’ve maxed out your credit cards and need a short-term loan. Borrowing money from a check cashing center seems like a logical solution, just as long as you pay everything back on time.
The Short-Term Problem
The issue with that is fees accumulate over time and start eating away at your paychecks. Two weeks later, you’ve run out of money again and this time, you can’t repay the full loan by the end of the term which results in another fee for an extension.
When the deadline arrives, the lender draws the amount for the initial loan, plus the interest, plus the extension fee. This results in a vicious cycle. After a year, you’ve paid three times the amount of your loan in fees.
The Long-Term Problem
Most payday loans are secured by receiving access to the borrower’s checking account or a signed check for the loan and borrowing fee. If the borrower fails to make their payment on time and doesn’t sign up for an extension (for a fee, of course), the check cashing center has authority to withdraw the amount due.
If the borrower opts for an extension, they can become victim to never-ending charges — draining their account and making it nearly impossible to escape.
On the other hand, if the borrower dismisses the extension and doesn’t have enough funds in their account to cover the charge, they’ll incur a bounced check fee. This can impact their credit score and reputation with the bank. If this becomes a habit, the bank can shut down your account, making it difficult to obtain a new one moving forward.
How Do They Get Away With This?
You’d think this trap was illegal. But according to the Consumer Financial Protection Bureau (CFPB), check cashing centers aren’t required by federal law to offer borrowers the lowest rates available — this is because lenders charge a fixed-fee price.
Although lenders aren’t legally bound to the low rates, federal law does require them to disclose the cost of the loan in terms of an APR. Taking time to read the fine print on the contract (both physical and digital), you’ll notice the interest rate is usually 300% or more.
If you or a loved one have fallen victim to this check cashing cycle, there’s still hope for getting your financial life back on track. In this guide, we’ll explain how to escape the payday loan and avoid using it again.
Sound Like You? Here’s How to Escape
While there are multiple strategies for escaping the cycle, most will depend on your financial situation. To free some funds for paying back your loan, you’ll have to minimize your expenses as much as possible. Establish a monthly budget and assess areas where you can cut unnecessary spending. Some of these might include your morning coffee, eating out or shopping.
Next, move on to low-need amenities like cable, internet and streaming services. Adding this extra money to your budget will allow you to put more towards the debt you’ve acquired — catching up on your payday loans.
The Industry Secret No One’s Told You About
If you’re still having difficulties coming up with enough funds to pay down your loans, it’s time to look into your larger expenses. Most often, insurance premiums are the highest reoccurring expenses on your plate. Instead, contact your local agent or shop around to look for lower premiums.
If you have good credit, you may be able to secure a personal loan with a considerably lower interest rate at WEOKIE than the payday loan.
Once you do this, follow these next four steps:
- Pay off and close out your payday loan.
- Make at least the minimum monthly payment for your new personal loan in full.
- Pay additional on the loan when you can.
- Use the extra funds from your cut expenses to make the minimum monthly payments on your credit cards.
Over time, you’ll notice your credit score begins to improve. But, there’s another way to set your financial goals on fast track — refinancing.
Refinancing with a credit union can free you from debt faster than transitional consolidation companies. During this process, the lender extends the term of the loan by reducing your monthly payments or the frequency of payments being made. By doing this, you’re able to put more money towards your debt — knocking it out even faster.
Is Refinancing Right for You?
Refinancing may impact your credit score initially, but will never be as costly as bankruptcy. Working alongside a credit union, you’re able to refinance auto loans and mortgages while consolidating piling debt.
Before visiting or completing an application, it’s important to ask yourself these three questions:
- Is your loan’s interest rate higher than your current loan rate?
- Do you have equity in your property or car?
- How long do you plan on staying in your home or owning your car?
These key insights help credit unions better assess your financial situation, customizing solutions that’ll serve you best in the long-term.
WEOKIE specializes in refinancing and would love to customize a plan that works best for you and your family. For more information about our auto loan and mortgage refinancing, reach out to us at (405) 235-3030 or firstname.lastname@example.org.
How to Get Started
Wondering where your finances stand? Take advantage of our free financial planning worksheet and jumpstart the process of escaping from debt for good.