How to Escape the Evil Clutches of Payday Loans

Disclaimer: This post may seem hypocritical to some because I have accepted advertising from payday loan companies in the past. However, there is a huge difference between letting a payday loan company pay me for an ad and actually recommending payday loans to my readers. After all the money these companies made from me over the years, I think it’s kind of fitting to get some of it back. My opinions are my own no matter who writes a guest post and/or advertises on my site.

Ah, payday loans. The bane of my existence for more years than I care to count. Payday loans can seem like a great idea when you’re desperate for money - they have offices on every corner, it’s relatively easy to be approved, and the staff don’t ask a bunch of nosy questions. You can walk out with an envelope of cash in 15 minutes if you come prepared. What’s not to love?

How Payday Loans Work

Let’s say your car dies and you need $400 to get it fixed. You need it fixed NOW; otherwise you won’t be able to get to work and you could lose your job. You don’t have $400 and neither does anyone in your family. Your credit cards are maxed out (or you don’t have any credit cards). You can’t get a loan from a bank. What do you do?

A lot of people opt for a payday loan. You walk in with a bank statement and a pay stub. You tell them you need $400. You sign a few papers. You write a post-dated check for a month from now for a little more than the amount you borrowed ($405 at a lot of places if you’re a new customer). You walk out with your money and pay for your car repairs. On the due date, you bring in $405 cash and your post-dated check is returned to you.

Easy, right? Except the story doesn’t end there.

Because that $405 is probably going to prevent you from paying your bills. So what do you do? You immediately take out a second payday loan. This time you only have 2 weeks to pay it back, and you owe $445 instead of $405. It’s only $40, you think to yourself. I’ll just cut back on eating out and it won’t be a problem. Two more weeks pass and you’re repeating the cycle.

In the meantime, you get really sick. You don’t have insurance, and the medication you need costs $300. So you go to a different payday loan place and borrow the money to pay for your medicine. You are now running between two offices every payday, handing over all (or more) of your paycheck, then signing your name to get the money back (minus $100 or so between the two loans) to pay your bills.

How do you get out of this hole you’ve dug for yourself? A lot of people don’t.

I Know Because I’ve Been There

When I was still married, my husband and I took out a payday loan for a car repair. We knew I’d be getting my extra student loan money soon, so we were confident we wouldn’t get caught in the endless cycle. And we didn’t - we borrowed the money, then paid it back a week or so later when I got my financial aid check.

But my “dear” spouse, in all his infinite wisdom, really enjoyed the ease of borrowing cold hard cash from the payday loan place. Less than a month after we paid off our initial loan, he took out another without telling me. And used the money to sign up for jiu jitsu classes.

It took probably six weeks for me to notice the chunks of money missing from our bank account. After all, we weren’t exactly great at keeping up with our finances. I usually didn’t look at our bank account because I didn’t want to know how bad things were! When I found out what was going on, I nearly hit the roof. With no extra money coming anytime soon, I knew there was no way we could pay off the loan. So we just kept paying and borrowing, paying and borrowing, paying and borrowing.

Then Christmas came. With 19 kids between both of our families (including our own kiddo), it never occurred to us to say we couldn’t afford to buy Christmas presents for everyone. This time I was the one taking out a payday loan. I had to go to a different place. When the lady asked if I had any other payday loans, I looked her in the eye and said “Nope!” (My husband did, but she didn’t ask about that, so I told myself it wasn’t a lie.)

We were losing over $100 every two weeks just for the privilege of making ends meet. It made me sick. Actually, it still makes me sick thinking about the money we lost. We could have had a heck of an emergency fund. But there was/is no point beating myself up over something that already happened - I just needed a way to fix it.

How to Get Out Once You’re In

There are basically two ways to get out of the cycle of payday loans. The first involves a lump sum of money - a tax return, a gift from family or friends, overtime at work, or money from selling something of value - that you use to pay off your loan and move on with your life. Since this doesn’t usually happen, most people (myself included) go with option two.

Using the earlier example of borrowing $400 and paying back $445, let’s assume you’re tired of this crap and want to pay off the loan for good. Here’s what you do.

The next time you go to pay off your loan and borrow more money, borrow $380 instead of $400. You may have to make some adjustments to make it through the pay period, but I promise you can do it. After all, before you got into this mess, you probably thought you couldn’t live without that $45 a payday you’re giving up right now.

So you’re borrowing $380 and you’ll have to pay back about $432 instead of $445. Hooray for progress! The next time, borrow $360 instead. You’ll pay back maybe $419. Notice how you’re getting $20 less each time but your payments aren’t even decreasing by $15 - that’s another way they keep you stuck.

Obviously if you keep dropping by $20 increments, it will take you about 100 years to pay off the loan entirely. It’s a good start, but it’s not enough. Time to get creative. What can you sell to make extra money? Do you have any skills that someone would pay for, like cleaning houses or mowing lawns? Any extra money you make should be saved for the next pay period - and that’s how much you decrease your loan. If you’re at $360 and you make $100 on the side, borrow $260 next time. Doing this takes A LOT of discipline. It sucks. But it’s better than being stuck forever.

How to Prevent Future Payday Loans

Okay, so you’ve hustled your butt off, your payday loan is history, and you’re breathing a little easier. But what if disaster strikes again? (You know it always does as soon as you think things are okay.)

Remember that $45 you were paying to the payday loan place every 2 weeks? Obviously you survived without that money somehow. So you’re going to keep surviving without it, as long as it doesn’t prevent you from eating. Open a savings account or get a shoebox, whatever works best. Every payday, put the money in that safe place and forget about it. It’s not there for you to pull from when you’re broke and you want to go to the movies. Pretend it’s gone, just like it was before. If you can leave the money alone, in a few months you’ll be prepared for a small emergency. In a year, you’ll have more than $1000.

It’s Not Easy

Saving money is never easy, especially when you’re broke. But I promise, if you can quit throwing away money on payday loans, you CAN make other changes in your financial life. You could create a budget. You could think about the two ways to get out of debt and what changes make sense for your situation.

Payday loan companies are evil. They prey on people in shitty situations and make things even shittier. They charge obscene interest rates to keep people trapped for years and years. If you don’t want to be in this position, you have to make a new plan for emergencies; one that DOESN’T include throwing money away.

For a jaw-dropping read about the payday loan industry, check out Broke, USA: From Pawnshops to Poverty, Inc. - How the Working Poor Became Big Business by Gary Rivlin. (That’s not an affiliate link or anything - I just learned a LOT from this book. And it made me even more determined to NEVER go down that road again.)

Have you ever been trapped in the cycle of payday loans? How did you escape? Are you trying to get out right now? Let me know what you think!

31 Responses to “How to Escape the Evil Clutches of Payday Loans”

  1. Dr. Jason Cabler says:

    Andrea, great post!  So many people don't realize just how badly they're getting ripped off when they get into these types of loans.  That's what the industry is counting on.  They know these consumers are either very financially uneducated or desperate (or both).  This is the type of thing that keeps poor people poor.

    I teach participants in my Celebrating Financial Freedom course that ANY type of debt does not work in your favor to bring you into prosperity, and payday loans are especially bad because of the astronomical fees.

    It's so good to see a real life example of what payday loans can do to you.

    Keep up the excellent writing and remember…

    "When you help me with money, you help the world prosper."- J.M. DuMont

  2. Eric J. Nisall says:

    Funny thing is, I was watching the football game last night and a commercial comes on for one of these "businesses".  During the guy's speech, he says that the fees may be high but not having the money is worse (or something like that).  I laughed at how they tell people up front that they charge really high fees yet they will still have a ton of business.

    I also read that many payday loan companies are partnering with Native tribes due to the tribes' exemption from many federal laws and they have no cap on the rates they can charge.  

    • I know exactly what commercial you're talking about because I saw it awhile back and made fun of it! But it makes me sad because so many people feel like they don't have other choices. The thing about Native Americans? Pisses me off. A lot.

      • Eric J. Nisall says:

        Down here people love the reservation since it houses the Hard Rock and there is so much to do there.  Plus the tax revenues are pretty good for the governments.  Personally, I think it's a joke to give one group of people so much free reign and everyone else has a different set of rules.  Restitution or not I think it all bs.

  3. Ashley @ Everything says:

    Last year they had a bill up for vote that made payday loans illegal in AZ.  I'm sure you know how I voted.  Great tips on getting out of the cycle. 

  4. Jackie says:

    Wow, I can see how hard it is to get out once you get sucked in.  I think a lot of people don't realize there are alternatives to borrowing money though when their car breaks down (assuming that they also don't have an emergency fund.)   When I blew the engine out on my car and was in that situation, I went to my boss and asked for a raise.  (Not sure what I thought that would accomplish, because it wasn't like an extra $1500 would show up immediately from a raise, but that's what I did.)  I did end up with a raise, and my boss asked me what was the matter and gave me $1500 to get my car fixed. Needless to say, I was very grateful. (And I did pay him back, even though it wasn't a loan.)   Alternatives beside a super-nice boss might be riding the bus, a bike, or getting a ride from a coworker or relative. Some cities organize carpools with strangers too.

    • Those are all excellent alternatives. However, I will say none of that would work if my car broke down. I work about 30 miles from home, so biking isn't an option. No buses or public transportation of any kind. No family members that drive to that town every day. A lot of poverty exists in rural areas, where there aren't as many choices. I live in a town of about 15,000 in the Bible Belt and the payday loan places outnumber churches. They know this area is profitable because there are so many limitations.

      • Jackie says:

        Yeah, at the time my job was about 20 miles away from where I lived, so I was a little panicked. Sometimes people are willing to do some pretty huge favors though, as evidenced by my boss.

  5. Changeonabudget says:

    Awesome Awesome post!!  So many of my clients use payday loans because they don't qualify for regular bank accounts or that is how their parents made ends meet so they view it as normal / necessary.  I've read lots of posts that explain how evil payday loans are but few that explain so clearly how to escape the cycle.  I'm bookmarking this for future use!

    • Glad it's helpful. :)

      There is definitely a culture associated with payday loans. Those are the only financial institutions that WANT people with low income and bad credit, so many people are likely to use them even when they know it's a bad idea.

  6. Anotherhousewife says:

    I love this post!  We have never used a payday loan service, in fact we haven't used a cc in over two years. I will confess that it does cross my mind when things are super tough. I blame the commercials I usually come to my senses quickly when I realize I ate my cash flow (dropping $6  here and there on eating out is my nemesis) and all I need to do is flex some self-control.  

    • That was the case for my ex and I as well. We should have had more than enough to cover our expenses, but we nickel and dimed ourselves to death. NEVER EVER take out a payday loan unless failure to do so will cause a loved one to die. I'm serious.

  7. Shaun Fowler says:

    I'd never heard of pay day loans, they sound like an awful idea to get tangled up into. I love your solution as well. It's simple, which means it'll work.

  8. quizshow says:

    I've been in the payday loan rut for the last 5 years. Pure. Misery.  Giving away 75% of my paycheck just to fees because I had no extra to start paying the principle down.  And then when I finally got one paid off, I had to reborrow to cover some new catastrophe or even to pay one of my major bills.  I had 9 loans and I'm down to 3. My only way out has been to call them directly and explain that my paycheck was going to be affected by a new work situation and that I could no longer make my minimum. Shockingly, 95% of the companies immediately stopped all interest and put me on a payment plan.  So now I feel even stupider for not doing it sooner.  At least now I will meet my goal of greeting age 30 with no payday loans hanging over me.

  9. ALICIAC says:

    Wow im sooooo glad i found your blog! My Mom has been trapped in this payday loan thing for years! It's funny because she's had the money to pay it off twice but still went back because she didn't learn to save for an emergency fund. She has that thinking that oh i won't be trapped forever, I can get out of it! But it's never the case , even though i can't stop her. It has made me deathly afraid to even step foot in one. These places are so sad and evil , really truly .

    • Thanks for your comment! I hate to hear that your mom has been stuck in the cycle. I think it places a lot of stress on adult children - I have a friend whose mom is stuck also, and she's constantly choosing between helping her mom and providing for her family. It just sucks all around.

  10. TL says:

    im stuck in a payday loan hell right now!! I have 3 to pay off..2 kids..1 job..ugh…I feel so like a loser!!

  11. Terry Pratt says:

    Some states cap the interest and fees lenders can legally charge. Where I live lenders can charge a setup/origination fee of 10% of the loan amount (maximum $30 on a loan of $300 or more) plus 36% annual interest (3% per month).

    So a $400 loan for 30 days would cost $30 + $12 = $42. Early repayment is always allowed and will reduce the interest you pay. (A loan repaid in 15 days would cost $36.)

    When you take out a loan in my state the loan is entered into a statewide database because borrowers are allowed only one outstanding loan at a time (so you can't pyramid your debt into a mountain). After you repay a loan you have to wait 7 days before you can take out another loan, this really slows down debt escalation.

    When these regulations went into effect, most of the payday lenders in the state closed up and left, but enough remained that loans are still readily available in most areas.

    • Hi Terry, thanks so much for the info! I'm glad some states are taking steps to regulate the payday loan industry, and I hope mine will follow. I will never think of payday loans as a good thing, but they would be less horrible if there were widespread caps and rules like what you mentioned. I appreciate you taking the time to leave a comment!

  12. alex greene says:

    Ah yes the payday loan insanity..I actually went bankrupt in 2003 becasue of this insanity..All over 800 bucks..even my bankruptcy aduster felt bad but back then payday loans where in their infancy compared to now. I had told him that this was a beginning of more to come in our society, he agreed, but of course it was a payday for him as well..As you deal with this system and it is a system, you see how its pretty well mapped out..Payday loans with their loan shark rates, and bankruptcy trustees with their rates, it will keep you poor and to the point where you no longer work for your company, you work for the pay day loan companies ..notice how they smile when u reloan…People please if you can avoid these places please do..forget about christmas gifts at christmas, go to dollarama for the little kids honestly a few days later nobody will remember, and u will be stuck in the payday loan cycle until the next christmas or until your sucidie note is found……


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