In 2021, the average American had a debt loan of $96,371, a 3.9% increase from 2020. All 50 states, including Washington, D.C., experienced a hike in average balances.
People sometimes need extra cash to cover unexpected expenses, and payday loans can be a temporary solution. Payday loans can help you get the money you need until your next payday.
But if you don’t pay attention, these loans can plunge you into debt and push you to get a new loan to pay off old debts. So how do you avoid the debt trap?
This article helps you learn how to overcome payday loans by getting out and staying out of debt so that you can manage your financial affairs better. Improving your financial management skills to reduce debt can alleviate financial strain and make you feel more secure.
Debt is not inherently bad, but the more you have, the greater your risk of bankruptcy. It is crucial to be equipped with the proper knowledge to combat a payday loan nightmare.
You Can Get Out of Payday Loan Debt
It may be challenging to get out of debt, but with careful planning and a strong will, you can make it happen.
1. Pay more than the minimum amount. Create a plan to pay down your debt by allocating more funds. Pay more than the minimum each month, and you will save money on interest while also paying off your debt sooner.
2. Prioritize paying off your highest-interest debt first. The loan with the highest interest rate will likely be the most expensive.
By paying off your debt in order of highest interest rate to lowest, you get out of debt faster and pay less interest. This method of paying down debt according to the interest rate is known as the “avalanche” approach.
3. Try the snowball method. With this debt repayment method, you focus on paying off the smallest balance first.
Consider using the snowball debt reduction method if you are paying more than the minimum amount on any of your bills.
By “snowballing” payments toward your smallest debt, you will quickly eliminate it and move on to the next smaller one while paying minimum payments on other debts.
4. Negotiate a payment plan with your lender. You may be able to reduce the terms of your loans or lower interest rates by calling creditors and telling them that you are having trouble paying.
When you talk to debt collectors, ask them to speak with their supervisors. Extended payment plans (EPPs) might be available, although they are not guaranteed.
5. Consolidate your debt. Instead of renewing existing payday loans, you should consolidate them with a more affordable loan and pay it off over time. Only borrow the amount you need to pay off your existing debt, plus enough to keep yourself out of the payday loan cycle.
6. Consider nonprofit credit counseling. A credit counselor can help you sort through the fine print and devise a plan to get out of debt.
However, if you’re in debt and living paycheck to paycheck, a credit counseling agency’s fees may be too much of an added burden. Fortunately, many nonprofits offer free debt counseling and financial planning.
Many military bases, credit unions, and local governments offer some form of financial education or counseling.
Tips to Minimize Personal Debt (and Stay Out of Payday Loans)
Here are some tips for avoiding payday loan debt.
1. Try other payday loan alternatives. There are many other ways to borrow money at lower rates than payday loans. Your bank might offer you a line of credit, overdraft protection, or a cash advance on your credit card.
If you have poor credit, consider asking your employer for a short-term advance on your wages or cashing in some days off. If you have the skills, time, and willingness to do so, consider taking on additional work as a freelancer or working part-time.
2. Build an emergency fund. Create an emergency fund so you will always have money for unforeseen expenses. Begin by saving a few hundred dollars, then build up to $1,000.
You should have enough money to cover three to nine months’ expenses. That way, you can handle emergencies without worrying about running out of cash.
3. Take good care of your credit. If you want to get a loan with favorable terms in the future, it’s essential that your credit rating is good now. If you have no credit history, establish one by getting a small loan and paying it off on time.
You can get a small loan or apply for a secured credit card. Your credit rating will improve if you make all your credit payments on time.
4. Create a budget that you can follow. Payday loans can get people into serious financial trouble when they are not used for emergencies and unexpected expenses. Making a budget can help you plan for some expenses and save money.
Keep in mind that there is no quick fix for financial troubles. Learning how to budget and avoid overspending takes time and discipline. Being financially stable can be done, and the resources listed here should help you.
Always keep an open mind about your options and know there may be more than one way to deal with your current financial situation.