Some people take out payday loans to pay rent or make other payments that only require a few hundred dollars. However, these same loans can turn into financial nightmares with compounding costs.
High fees make it difficult for people to make any progress with principal while keeping up with other costs, and it can create a negative feedback loop. Knowing the pitfalls of payday loans can help you think twice before taking out one of these financial products.
How payday rollovers work
A payday loan is a small, short-term loan designed to cover emergency expenses while you wait for your next payday. That may sound tempting, but it can be a trap, as borrowers can pay extra to extend the loan’s due date. This amount does not help to reduce the principal, and people who keep paying this amount to postpone the due date can end up in a constant cycle of debt.
The Consumer Financial Protection Bureau (CFPB) often warns against payday loans. It gives an example of a $300 payday loan and includes $45 in rollover fees every two weeks until the borrower is able to pay the principal and accrued expenses. That results in $360 in rollover fees after four months, plus the borrower still has to pay $300 in principal.
Fees trade long-term financial strength for short-term convenience. Borrowers get late paying the principal, but all payments eventually go past the principal without making progress toward being debt-free. This trap can especially hurt low-income borrowers.
Why borrowers get stuck even if there is protection
Not every payday lender has no-cost extended payment plans, which limit how much money can be accumulated on your loan, and not every borrower knows that those plans exist. This confusion makes it easy for payday lenders to steer unwary borrowers into lucrative loans.
State protections for payday loans vary. Some states have completely banned payday loans, while others have fewer restrictions.
What borrowers can do before paying another rollover fee
Before paying a fee or agreeing to a loan that includes these fees, ask if you qualify for an extended payment plan or a no-fee payment option. If that doesn’t work, you can contact the CFPB or your state attorney general if you believe your lender misled you about payment options. Nonprofit credit counselors can provide guidance, and you can reach out to your bank or credit union to learn about your rights and determine your next steps.
Local aid organizations and employer hardship programs can provide financial support to help you pay off the balance. While you’re checking out local agencies, you can also review the CFPB’s consumer guidance, which offers some suggestions if you can’t repay your payday loan.
