Getting Out from Under Payday Loan Debt

It happens to lots of people. They take out one payday loan for $200 then, unable to pay it back in the given time frame and having exhausted all the renewals, they take out another loan with another company, then perhaps another and another. Before long, the borrower is unable to pay back any of the loans and the debt is soon spiraling out of control.

Throughout the United States, an estimated 25 million short term (payday) loans are made each year, according to the Online Lenders Alliance Web site, and although the average payday borrower is 43 years old, has a job or income of about $45,000 a year and a college education, when financial crisis hits, they turn to payday loans, having exhausted other resources like friends, family and credit cards.

When borrowers find themselves trapped in the payday loan cycle, unable to keep up with payments, there often seems to be no place to turn. The payday loan companies know this (they've built their business by knowing their customers) and when a customer does not pay on time, payday loan companies tend to go on the offensive, and some resort to scaring, intimidating, harrassing and even threatening arrest in an attempt to coerce payment from their frazzled customers. Many will call their clients relentlessly both at home and at work. They will call the references given on the loan and sometimes threaten arrest or lawsuits. Scared and exhausted, some clients find themselves without any other option and they take out additional loans, and so the cycle continues. But there is a way out of payday loan debt and it doesn't involve incurring additional debt.

There are debt consolidation organizations that specialize in dealing with payday loan companies and although they are not free (or cheap) hiring the services of one might be an option for someone with thousands of dollars of payday loan debt that they are no longer able to keep up with. If the payday loan debt to income ratio is small, and reduced payments are manageable, borrowers might find that they can get their payday loans under control on their own with the following steps.

1. Stop the calls. Not answering the phone and avoiding the situation will only make the matter worse. Keep in mind that the payday lender has a legal right to attempt to collect the debt. Yes, there are rules they must follow, but if you took out the loan, you owe the money and must pay it back. But as a borrower, you have rights too and if you instruct the lender to stop calling, they must comply. Begin with a letter or an email to the company's collections department that clearly states that going forward you will only do business through mail or e-mail. Word the letter something like this: "Further contact must be through email or postal mail. You and anyone doing business in your name are hereby prohibited from contacting me via telephone calls at my home or workplace and you may not call my references on my loan application."

2. Contact the collections department. Soon after you send the letter (or email) advising the company that you prohibit them from calling, chances are they will send you a letter or an email reminding you that you still owe a balance. They may ask you to call or contact them through email. Respond to them (you can either call or email) and let them know you want to repay your debt but are unable to uphold the terms of the loan application. Be polite and remember, it is in their best interest to work with you - after all, they are in business to collect the money they lend. Although it might not seem like it, you, the borrower, has the upper hand. Most lenders would rather work with a borrower on a repayment plan then spend money going to court and chances are, they will offer you payment arrangements. Work with them and find an arrangement that is affordable to you. If the payments they suggest are too high, counter with a suggestion of a lower amount.

3. Stick to the plan. Once a payment plan has been established, stick to the plan and don't miss payments (make sure any plan you establish is affordable to ensure that you can easily make them). Doing so can cause your loan to immediately return to default status, starting the whole cycle all over again.

4. Avoid taking out new loans. After your loan is paid off, look at ways to reduce your monthly expenses and avoid taking out additional payday loans.

For more information about what payday lenders are allowed to do and what they are not allwed to do, visit the Federal Trade Commission's Web site, www.ftc.gov.

Sources:
Online Lenders Alliance Web site, visited Nov. 16, www.onlinelendersalliance.org
Federal Trade Commission Web site, visited Nov. 16, www.ftc.gov