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) 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.
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.
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.