Payday loans have infiltrated every neighborhood and income level. And what starts out as an emergency loan to cover a temporary cash shortage can turn into a cycle of obtaining new payday loans to pay off older loans. And so it begins, a process of going from one payday lender to another. An entire day can consist of making the rounds from one lender to another just to get by another week.
Nobody intends on becoming caught in the high interest rate trap of payday loans, it just happens over time. It’s a temporary thing to pay bills and fix the car until that cash comes in from a tax refund or the next paycheck. Everyone knows that payday loans charge in excess of 400% interest and that they are bad deals, but it’s just temporary until the cash comes in. No one intends on getting caught in the trap of not being able to repay the loans, it just happens.
And when it is clear that you cannot honor that loan, what do you do? Well, you find another payday lender. And that solves the problem for another week. But when that check comes due, you seek yet another, and then another, and still one more.
At some point you realize you are trapped in an interest rate cycle that will not stop, but what do you do? How do you get out of the trap?
A recent client came to me with $8,000 of payday loans with interest rates averaging 400%. It would cost $32,000 a year to just to pay accruing interest without reducing any principal. He hit the wall and just could not continue the cycle. He had no other debt–just payday loans that got out of hand. So what were his options?
1: STOP PAYING THE DEBT.
The truth is, payday lenders fully expect their customers to stop paying at some point. And until they stop paying they will pressure and threaten their customers. Threats of lawsuits and judgments and garnishments and even criminal prosecution for writing bad checks. That’s how they make money. By the time the customer quits paying they have fully paid every dollar borrowed many times over.
Payday lenders are fully prepared to work out reasonable payment terms with their customers, but not until the customer stops paying and makes it perfectly clear they will no longer be a victim.
2: BRACE FOR THE PHONE CALLS AND LIES.
When you stop paying the payday loan, you will get calls. At first the calls are “did you forget to pay us?” and then later they become “you are going to jail for writing a hot check!” and “the Sheriff is coming to your work to serve papers and arrest you!”
This is why it was so hard to stop paying, because you believed their lies and worried that you would go to jail.
Know this: it is not a crime to default on a payday loan. A post-dated check written to a payday lender is not the same thing as a check written to a grocery store. When you buy groceries with a check you are representing to the store that there are funds in the account now, but when you give a post-dated check to a lender you are saying there are no funds in the account to honor the check today. There is no representation that the check is good today, therefore there is no crime if the check bounces. The post-dated check is a loan, not a representation of funds on hand. That is the key difference. But payday lenders will lie to you and say you committed a crime when the check bounces so you panic and pay them. Ignore their empty threats.
3: DEMAND A REPAYMENT AGREEMENT.
When payday lenders call tell them you cannot honor the old agreement and that you want a new deal. You cannot and will not pay another dime unless you receive a written payment agreement that you can afford.
This step requires that you figure out what you can honestly pay each payday to pay off the debt. And you must figure out this answer not just for one debt, but for all the payday loans. What is the total you can pay towards all the payday loans each payday? How many paydays will it take to pay back the principal owed on each loan? Whatever that answer is, offer that and make no further payments until they agree.
4: EXPECT TO BE SUED.
More likely than not, you will be sued when you default on the payday loan. Don’t look on that as a bad outcome. Why not? There are two good things about being sued. First, you can now deal with the lender’s attorney and offer to pay back the debt at a level you can afford. Those attorneys are often paid in commission and they generally favor any solution that results in a repayment of the debt. Second, even if the payday lender obtains a judgment, the interest rate on a Nebraska judgment is usually less than 10%. You will find it much easier to repay a judgment at 10% interest than to pay the original loan at 400%.
5: OFFER A CASH SETTLEMENT.
When you stop paying payday lenders the door to a cash settlement opens up. If you are able to tap into a source of cash (time for a garage sale?), offer the lender 50 cents on the dollar if they will send you a settlement letter. NEVER pay a settlement until you receive a signed settlement letter. At first the lender may balk and threaten to garnish wages. Just smile and tell them to get in line with the other dozen creditors who called this morning. Stand firm. No settlement letter, no payment. There is no need to raise your voice or to convince them of anything. If they refuse just hang up and wait for their next call. Eventually they will either sue or settle, and you shouldn’t care which option they choose since you win either way. Act like you don’t care and they will take you seriously.
6. SPEAK TO A DEBT MANAGEMENT PROFESSIONAL.
The way you look at a financial problem and the way I review them is completely different. You are trying solve the immediate chronic pain you are facing, but I’m taking a much wider and longer perspective. If you owe one $500 payday loan, that is small problem that goes away, even if you are freaking out about it now. I want to know the larger problem. It’s not just about today’s problem but a question of your trajectory. My office is a supply house of financial band aids along with an intensive care unit. When you are hurting you lose perspective, and what we do is to measure the severity of the problem and recommend the correct course of action.
Payday loans are usually the tip of the financial iceberg that reveals a much deeper problem. Payday loans are usually obtained when other sources of credit have run out, so we need to look at ALL of the debt, not just the payday loans.
Payday lenders may spook you, but not us. In fact, we tend to spook them since we discharge their debts in bankruptcy and know how to defend against their collection lawsuits.
Okay, it’s your turn. Let’s light up this article with good comments. When you ask questions on this blog it not only helps you but it helps other readers. I love questions. Fire away.
Image courtesy of Flickr and Jason Comely.