Getting Out From Under Payday Loans: 7 Options

by Gary Foreman

Getting out from under payday loans can feel like trying to get out of quicksand. Hopefully these tools can help you keep from drowning in payday debt.

Gary,
I’m in need of some money and cannot get a loan. I have several payday loans that I cannot get paid off. I’ve been trying for several years and I only have enough money to renew.

If I cash out my 401k to pay these loans off, I will have plenty of money each month to put back in my 401k plan. Will I still face the extra 20% penalty at tax time?

I’ve learned my lesson and I will never get mixed up with paydays again. I think they should be outlawed.
Michelle

They’re also known as cash advance loans, check advance loans, post dated check loans or deferred deposit check loans. The Federal Trade Commission has called them “costly cash.” According to ChamberOfCommerce.org, roughly 12 million Americans take out payday loans each year and payday lenders take in about $9 billion each year in fees on these loans.

Payday Loans Make It Too Easy To Borrow

Typically the borrower, in this case Michelle, would write a check for the amount of the loan that she wants plus a fee. The size of the fee is based on how much money she’s borrowing. The lender agrees to hold the check for one or two weeks. Typically until Michelle’s next payday.

At that time Michelle can come in with cash to “redeem” the check, she can let the lender deposit the check or she can “roll-over” the loan until her next paycheck. If Michelle chooses to roll the loan, she’ll incur another fee.

Payday Lenders Have the Upper Hand in Collecting

If Michelle can’t redeem the loan or refuses to roll it, she’ll be informed that they’ll deposit her bad check. If it bounces, they could threaten criminal charges of intentionally writing bad checks. Not to mention bounced check charges from her bank.

Many payday lenders don’t want Michelle to know how much she’s paying. Usury laws limit the amount of interest that can be charged on a loan and most payday lenders do charge the maximum allowed by the state in which they operate. But because of the way these loans are structured, it is not uncommon for the annual percentage rate on payday loans to be as much as 400%.

7 Options for Getting Out From Under Payday Loans

Presumably, Michelle wouldn’t be taking a payday loan if she could have gotten the money somewhere else. These options might be available to her for paying off her payday loans.

1. A 401k Loan

She’s considering taking money from her 401k plan. Any withdrawal will be subject to a 10% penalty and will be added to her taxable income for the year. So she’ll probably lose 20% of the withdrawal to the federal government. But that’s better than paying 400% APR.

Michelle may have a better choice. Borrowing from her 401k plan would provide the money she needs now and allow her to pay it back through payroll deduction. She should speak with the human resources department to find out the details about a 401k loan. The biggest advantage is that money borrowed is not subject to tax penalties or added to her income for tax purposes unless she doesn’t repay it.

Related: How a 401k Loan Affects Future Wealth

2. Borrow From Family or Friends

Other options that don’t involve her 401k should also be considered. She could consider borrowing from a family member or friend and agree to pay back the loan with interest — at a much cheaper interest rate.

3. A Credit Card Cash Advance

Payday loan companies have sprung up primarily to serve clients who don’t qualify for a credit card. If Michelle is among this group, she should check her credit report for errors. Roughly one in four reports contain a significant error. A corrected credit report might qualify her for a credit card and cash advance privileges.

4. Get Payments Reduced

If Michelle has other monthly payments, she might be able to have one or more of them either reduced or delayed. A call to the creditor might be all it takes.

5. Get a Personal Loan

There are many alternative lenders that will loan to those in need of emergency funds, even for borrowers with poor credit. These loans often have high interest rates — as high as 35% — but could make it possible to break the pricier payday loan cycle.

6. Seek Professional Debt Help

Another alternative, if she has other debts, would be to see if credit counseling or debt consolidation would work for her. Either could reduce her regular payments and free up some money to pay off the payday loan.

7. Cut Expenses

Finally, Michelle should cut any expenses that aren’t absolutely necessary. This is a time for drastic measures.

Related:

• 10 Ways To Prevent Non-Essential Spending
• 19 Ways To Raise Quick Cash
• Surviving a Cash Crisis: 10 Places To Look for Extra Money

Michelle is in a tough spot. She needs to get these loans paid off before they force her into bankruptcy. Hopefully, one of these tools will help her dig out of debt.

Related:

• What Does My Debt Cost Me?
• Do You Have a Relationship With Debt?
• Are You In a Debt Spiral?
• When Expenses Exceed Income

Reviewed February 2023

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.