A payday loan, also called a cash advance, is a type of short-term borrowing. It's a fast and effective way to obtain a small sum of money (usually under $500 loans) to meet regular expenses or unexpected emergencies. The money is usually transferred to the borrower's checking account, and the borrower writes a postdated check in the amount he or she wishes to borrow plus some fees. The lender holds onto the check and cashes it on the borrower's next payday (hence the name).
Contrary to popular beliefs, payday loans are not ominous. The industry is still very much alive and thriving. There are millions of borrowers for whom these short-term loans are proving as a boon.
The first time people took out a payday loan: 69 percent used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; 16 percent dealt with an unexpected expense, such as a car repair or emergency medical expense”, according to a study by the Pew Trusts.
However, at times, few borrowers fail to pay the lender on the agreed upon date, hence risk additional fees or penalties, or even a lawsuit or wage garnishment (in case the court orders in favor of the lender).
If you know the right way to pay off payday loans, it’ll help you save money and avoid unwanted financial and legal consequences.
As with any loan, a short term installment loan or personal loan based on your proven income takes dedication and discipline to resolve (pay off), and many people can find themselves trapped in a vicious cycle of trying to repay a loan of this kind due to unforeseen circumstances or personal decisions that prevent a potential resolution. This is not an uncommon situation, as many borrowers at time find themselves unable to make a payment or even becoming frustrated and giving up. We want to try and dispel some potential myths and rumors that sometimes surround short term personal installment loans, and why it is in everyone’s best interest to pay off the loan as soon as is possible.
Contrary to what you might believe, your lender is most certainly not punishing you with extra fees and increased interest rates in the occurrence of a missed payment or the need to restructure the loan. The practice of fees for restructuring is common throughout the small loan industry, and has more than one purpose. First and foremost it is necessary to cover the processing required to restructure a loan. Secondarily, it is also meant as incentive to pay off the original loan in the original time designated in the terms. It is better for all involved primarily because if a relationship between lender and borrower sours, then it is unlikely future transactions will take place.
If you find yourself in such a position, contact your lender and discuss your options. Avoiding contact with the lending institution regarding a missed payment on your short term installment loan is seen in the industry as an indicator that the borrower will default. Even though you may incur higher interest rates and additional fees, paying off the loan is vastly better for your future credit, and it keeps you in good standing with the lender should the need arise for another short term personal loan down the road.
Understand the Basics of Payday Loans
Know the business: A payday loan or cash advance is one of the most convenient small borrowing options. Interestingly, the finance charges associated are often much less compared to what a borrower might pay in overdraft fees if he overdrew from his checking account.
However, you face late fees and rollover rates if you fail to repay the loan on time or the loan term needs an extension. The interest rates on payday loans are often very high, and making delay in paying it back can be tough to pay it back altogether.
Read the fine print: It's critical to understand the terms and conditions of the loan before you sign any financial agreement. Ignoring the fine print can cause you to accrue massive debt and create a complete mess unintentionally.
Ask questions: Your payday lender is always there to help if you have any questions regarding the lending process or anything. It is important that you borrow only after having all your doubts cleared up so that you don’t inadvertently forget to pay off your loan.
- See if your loan is set up to renew automatically. Some payday loans renew automatically and require the borrower to make the payment before the first due date to end the cycle.
- Know about any additional fees in advance. While some lenders charge additional fees to deposit the amount in your checking account electronically, some will charge if you're given a prepaid debit card containing the loan amount.
- If you've authorized the lender to withdraw funds from your checking account, know when and how much the lender will remove.
Pay off Your Loan
Paying back a payday loan by the next payday is nothing unimaginable or outrageous. Careful planning can help you avoid mistakes and ensure that the loan is paid off in due time.
Plan to pay off the loan by your next payday: Postpone any large and unnecessary purchases for the time being. Make use of the borrowed money only for the reason you took out the loan. If there is any surplus, keep it in the checking account.
- Make sure you got sufficient funds in your account on the due date.
- Stay in touch with the lender to make sure you have not accrued any additional fees or charges.
- Plan the mode of repayment in the beginning, and keep your lender informed about it.
- Many lenders let you pay off the loan early. But make sure there is no early payoff fee.
Enter an Extended Payment Plan (EPP): An EPP lets the borrowers extend the repayment period by several weeks without any penalty. This is something very comforting for many payday loan borrowers, as it enables them to get their finances on track and provides enough time to plan the payoff.
However, not every payday loan provider offers the EPP. There are certain restrictions on Extended Payment Plans as well.
- Lenders who are members of the Community Financial Services Association of America (CFSA) are usually required to offer this facility to borrowers who are interested in this repayment strategy. Check with your lender to see if they have any association with the CFSA.
- States that have adopted provisions governing Extended Payment Plans offer the state-mandated extended payment option instead of the CFSA's EPP. Visit the National Conference of State Legislatures website to know more about your state’s payday loan statutes.
- If you take out a loan through a CFSA lender, you have to request the EPP by the business day before the next payday.
- In order to request an EPP, you must visit the actual loan producing office and sign an amendment to the original loan agreement, thus agreeing to the new payment schedule.
- Though there is no fee for an EPP, the lender may charge a fee and accelerate the payment on the balance if the borrower defaults on the EPP.
Consider assistance from local programs such as churches or charity organizations: These can be very helpful if you get behind in repaying your short term personal installment loan. It should be noted that it is highly unlikely you will receive cash from these programs, but instead they would work directly with the lender to see what options are available. Most of these organizations can be found by doing an online search. Be prepared to answer a lot of direct questions regarding your financial situation and have paperwork handy to back up your claims.
Sell a valuable: This might be preferable to defaulting on a short term personal installment loan. If you have antique dealers or pawn shops where you live, consider paying them a visit and getting your item appraised. If it turns out you can cover your loan, or at least allow you to stay current on your payments, then there is always the possibility you can redeem the item (at least from the pawn shop) and resolve all issues. It’s not fun to consider, especially if the item is a treasured family heirloom, but the option should at least be considered for the sake of preventing a default on a loan.
Ask a family member: This is also an unpleasant prospect, but if you have completely run out of options, consider asking a family member for an advance, and promise to pay it off when you are able. Finances between close friends and family members can become a source of conflict or tension and it is understandable that you might want to avoid such potential division. But as with the potential item of value, staying current is better and more cost beneficial to you than defaulting or missing a payment. The decision must be yours, of course, but you might actually find someone who understands what you’re going through who is willing to help out. Remember, you can always say “never mind” if you sense even the slightest amount of discomfort in the other party.
Budget: In the meantime, if you can anticipate the potential missed payment of a short term personal installment loan, there are preventative actions you can take to help avoid a missed payment or default. The first is tightening the budget. Even if you’ve already cut out potentially frivolous spending, take a second look and see if there are additional cuts you can make. Remember, this is a short term loan, so the cuts don’t have to be permanent, just enough for you to grit your teeth and ride out the tough times until you get things squared away once again.
Cut back on bills: Look at larger expenses such as utilities and look for ways to cut back on energy use, the cable bill, or a service where you can reduce monthly costs like the phone bill (For instance: don’t turn the heater down, but on warm days, consider turning the air conditioner off altogether, look through our blog for articles about helpful tips on simple ways to save money or cutting costs).
Talk to a credit counselor: Most states offer credit counseling programs free of charge, and you may discover something you did not know before. These programs are not designed to make you feel self-conscious or guilty. In fact, they’re designed with the exact opposite outcome in mind; giving you the much needed tools to get yourself financially stabilized, back on your feet, or just headed in a new direction with better credit.
Roll over your loan: Though rollovers on payday loans are not always allowed, in some places you can do it (if the local and state laws permit). Rolling over a loan gives you the necessary time to amass funds required to pay off the loan. Being a borrower, you're restricted to four rollovers or the state limit on a single loan (whichever is less).
Limit the amount you borrow (what you need). Borrow what you know you'll be able to pay back without any trouble using your next paycheck, and by the next payday.
Pay back the quick cash loan amount plus the fees as soon as you can. Rolling over a loan is never an ideal option. You simply keep on accruing more debt by delaying the due date. Just for this reason, many states have set limits or outright bans on rollovers.
Above all, make sure you do some research before you even take out a short term installment or personal loan. Know your options and your obligations ahead of time so you can make an informed decision. As CASH 1 subscribes and abides by the practices of responsible lending, so too do we encourage you to borrow responsibly. Remember, your loan is based on the information you provide, and your proven income. If everything remains the same throughout the terms of your loan, there should be no problem in repaying it. If you’ve got questions, come see us online, or give us a call. One of our professional loan specialists will be happy to answer any and all queries.