How to Avoid Getting into a Debt Trap with a Payday Loan

A payday loan is a small amount of money that is given to a borrower for a short term. It can be very beneficial in case of unexpected expenses, such as car repair, household problems, or family emergency. A survey conducted by the Federal Deposit Insurance Corporation estimates that about 20% of the U.S. population obtained payday loans or other alternative financial services during the year.

A payday loan allows you to get extra cash fast and easily. The only problem is that you may face rather high interest rate and huge extra fees if you cannot repay it on time and in full. In that case, you are likely to get into a vicious circle when to pay the already existing loan you have to obtain another one. Unfortunately, such a scenario is not rare. The statistics provided by the Consumer Financial Protection Bureau shows that 1 in 5 payday clients end up taking out at least 10 or more loans in succession. With each new loan, the customer pays additional fees and interest on one and the same debt. The interest rate, in this case, reaches even more than 300-350% annually. This article will help you to discover some tips how to avoid getting into a debt trap while taking a short-term loan.

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Take Your Budget into Consideration

Look at your monthly budget, considering the future income. Decide whether you are able to pay back a loan, taking into account the percentage of the interest rate that ranges from $10 to $30 for every $100 borrowed. If the answer is "no", you had better find other options, such as loans from non-profit organizations or help from family and friends, because you are likely to get into a debt trap.

Be Careful when Sighing an Agreement

If you don't have another option and the circumstances force you to take a payday loan, the first thing you need to do is to read the documents very carefully. According to the Truth in Lending Act, the agreement between a lender and a borrower should beclear and transparent, excluding any additional hidden fees.  So, make sure you are aware of the terms you are agreeing to.

Start a Savings Plan

Instead of taking more loans to pay off the first one, try to rearrange your earnings and expenses in such a way that will allow you to live within your own income. A financial plan with the information about the money you earn and spend will help you to dispose of it properly and wisely.

Consult a Consolidation Company

If you cannot deal with a financial plan on your own, you can ask a consolidation company to lend a helping hand. They will give you assistance in order to manage your income properly and help not to get into debts. In addition, there you will get professional guidance and support.

In conclusion, many people need financial help from time to time in order to make both ends meet. Be sure you will be able to pay off a short-term loan immediately without getting it renewed.