5 tips to break the payday loan consolidation cycle


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This story originally appeared on The Penny Hoarder.

A payday loan consolidation can offer quick reprieve from unforeseen expenses or a period of bad luck.

But if you don’t have enough money to pay off the loan on your next payday, you may need to take out another loan or turn your balance into a new loan with interest rates up to 300%.

According to the Consumer Financial Protection Bureau, 1 in 5 new borrowers end up taking out at least 10 payday loans.

This payday loan cycle can turn a short term loan of a few hundred dollars into a growing mountain of debt totaling thousands of dollars. And when you’re so far behind, it’s hard to get ahead.

If this sounds familiar to you, read on for some practical tips on getting payday loan consolidation”}” data-sheets-userformat=”{“2″:8705,”3”:{“1″:0},”12″:0,”16″:10}”>payday loan consolidation

1. Reduce your costs

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Cutting back on spending can be one of the hardest ways out of the payday loan cycle if you’re already living on a tight budget and struggling to find ways to save money. If you can’t cut costs, you may need to seek help to temporarily cover some of your costs.

Asking for help takes strength, but it can make it easier to find extra money in your budget, even if it’s only for a month or two. You may be able to access free meals for your school-aged children or visit a local pantry to get by on a lower grocery budget. College students may be able to seek help from an emergency financial aid fund.

Your church or local community groups may be able to get you temporary help. You can also call 211, the United Way’s health and social services referral line, which can direct you to services in your area, or visit 211.org to find resources.

2. Earn more income

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Kisha Howard of Orlando, Florida turned to payday loans when she felt strapped for options to make ends meet. “At the end of the day, if you didn’t have the money to start with, you still won’t have it,” she warns.

To fill her financial deficit, she worked as much overtime as she could to increase her income. “With each pay period, I would decrease the amount of the loan needed until I no longer needed the extra funds and could cover the bills with my income,” she says.

If you have spare time and energy, it might be worth taking a side gig. Consider selling your services as an animal keeper, weed puller, or runner – these side activities don’t require a lot of start-up costs.

3. Use a bargain for payday loan relief

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Lisa Servon, a professor at the University of Pennsylvania, has studied the payday lending landscape for years, speaking to hundreds of borrowers about their experiences.

She said breaking out of the payday loan cycle often requires some sort of windfall, recalling a woman she interviewed who used her tax refund to pay off her loan. “She really focused her tax refund on the earned income tax credit, paid off the loans, and then really cut spending and monitored her spending,” Servon said.

Getting a huge tax refund isn’t ideal, but if you’re expecting to get some Uncle Sam back, it can help you get out of that payday loan hole.

4. Ask for payment terms

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Thinking back to her payday loan experience, Kisha Howard sees it as “a very expensive shortcut.” She says it is “better to budget accordingly and ask for invoice arrangements if necessary.” Businesses work with you when you communicate.

You may be able to negotiate lower bills for essentials like utilities or set up an interest-free payment plan to make larger bills more manageable.

5. Talk about it

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“Advocacy and organization are the solution,” says Maurice BP-Weeks, co-director of the Center for Action on Race and the Economy.

He compares the payday loan landscape to the housing crisis of the Great Recession. “If you got into the spiral, it’s really not your fault,” he says. “Contact CFPB or your local representative and explain your situation. It is not fair. Businesses should not be allowed to sell these products.

Likewise, it can be helpful to talk openly about your situation with your friends and family. You may be able to provide some valuable advice before someone you know turns to payday loans when the need arises.

A dozen states have banned short-term, high-interest loans, but it’s still easy to get a payday loan – and get trapped in the debt cycle – in most countries.

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Bonny J. Streater