How to Pay Off Payday Loans

A payday loan might have pumped up your assets column in the way of giving you readily available cash on hand, but it certainly didn’t help your liabilities. In fact, you may just find that a payday loan quickly becomes your fastest growing liability. Unfortunately, most lenders have become very good at explaining to borrowers how to borrow money, but they never covered how to pay off payday loans once you’ve borrowed them. To make up for it, here is a short guide.

The first thing you need to do is evaluate your budget, and to see if you can truly afford to pay off the loan in the first place. In some extreme cases, people who are paying more on their debt service than they earn each month may be better suited for bankruptcy, or at least a debt settlement. It simply doesn’t make sense to continue to paying on a debt you cannot afford, and you shouldn’t throw good cash at a problem that will never have a solution. A debt that is growing faster than your ability to repay it is a debt that may have to be charged off.

If you believe that you can make sufficient payments, and that you have more income coming in than debt expenditures (and all other costs) going out, then here is a very simple guide for paying off your debts:

1. Check EARs – EAR is nothing more than the Effective Annual Rate, or total cost of carrying a balance at a payday loan business including all fees and other charges. The EAR differs from APR in that it is calculated on all costs of loans, not just the interest rate cost. The interest rate cost, which is often one of the smallest costs in a payday loan, does not tell us enough to know how we should pay it off.

2. Order debts by EAR – Our goal in paying off payday loans is to do it in the most efficient way possible. That is to say that we want to pay off payday loans as quickly as we can, and do it in a way that leaves us paying the smallest amount of interest, fees, and other charges. Ideally, we’ll work from high EAR loans to low EAR loans, and hope to knock out a full loan each time we make a payment.

3. Progress – Because payday loans charge fees, we want to be sure that we are paying the least amount of money toward fees as possible, since they are the costliest part of payday loans. A payday loan of $100 with a monthly fee of $20 is costing us 20% per month in effective interest, which is not helping us eliminate this debt. Therefore, it would be advantageous to pay off such a loan immediately, and to remove it as soon as possible. Remember, even if you pay off $95 of the balance this month, you’ll still have to pay a $20 monthly charge the next month on a balance of $5…an effective interest rate of 400% in just one month.

4. Negotiations – After determining a plan, it is now your job to negotiate with your lenders for a lower cost loan. It would be recommended that you do this by sending the lender a letter, in which you ask for new payment terms to pay off the loan quickly. If you owed a total balance of $1000, you might ask if you could arrange to pay $100 per month for 11 months. While this may sound like a poor deal for your lender (it is), you should make it abundantly clear that without an agreement, you won’t be able to pay back the money at all. All lenders want to receive a minimum of their money back; this offer is more than fair and far better than the alternative.

5. Consolidating – Once you’ve heard back from your lenders, and you have explored opportunities in negotiating lower monthly (and total) payments, then proceed to consolidate as many loans as possible. A bank can help you here. You can borrow to pay off your high interest payday loans with a less expensive loan from the bank. For example: $2000 in payday loan debt may cost you as much as $6000 per year in interest and fees. You could instead borrow $2000 from a bank, repay your payday loan lenders, and then slowly pay off the bank, which may charge only 10-20% interest for a personal loan. Compared to $6000, paying back $2200 or $2400 (10 or 20 percent interest) is a far better solution.

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