How to Manage and Repay Small Payday Loans

According to a report by the Pew Charitable Trusts, 12 million Americans take out a payday loan each year. Collectively, they spend around $9 billion on loan fees. 

If you need cash right away, a payday loan can be an attractive option. These types of arrangements allow you to gain quick access to the money you need via a simple application process that usually takes place online. While you can expect to pay more in fees and interest on these loans, most borrowers are willing to accept those drawbacks in exchange for a quick reprieve from their financial troubles. 

Small payday loans fall into this category. If you’re thinking about taking one out, then it’s important to know how to manage it effectively. Today, we’re sharing tips and advice to help you avoid a debt trap and successfully repay your loan on time. 

What Is a Small Payday Loan?

Before we dive too deep into the tenets of debt management, let’s take a minute to discuss what small payday loans entail. Put simply, these are short-term loans for a small amount — usually $500 or less. They are designed to provide you with temporary money that you need when an expense arises and you’re in-between paychecks. 

Once you get paid, you’ll pay the money back, and then some. In exchange for the convenience they provide, most small payday loans include higher interest rates, as well as fees to offset the lender’s risk if you default. In fact, your loan could come equipped with an annual percentage rate (APR) that can reach as high as 400%. 

This is in comparison to traditional personal loans, which are paid in installments. On those, the APR is normally capped at 36%. That cap is in place because financial analysts believe it to be the maximum rate that consumers can afford.

The upside? Lenders who offer payday loans do not typically require applicants to complete a credit check. That makes these types of loans especially intriguing for consumers whose credit scores are in the poor-to-fair range. 

How Do They Work?

To apply for a payday loan, you don’t need to supply your credit information to the lender. Instead, all you need is a bank account, as well as your ID and proof of income. 

Most lenders will require you to provide a post-dated check for the amount of money you need. This allows them to directly access the money in your checking account. Alternatively, you can give them direct access to your account and bypass the check. 

Either way, once your payday arrives, the lender will use the funds you provided to pay themselves back for the full amount of the loan (including interest and fees). The payment will be in one lump sum, not spread out over monthly installments. 

In addition to higher supplemental costs, there’s also another characteristic factor of payday loans: the repayment timeline. You won’t be able to pay these back over the course of a year. Instead, your lender will usually capture the funds around two to four weeks after making the loan. 

What happens if that date comes and you’re still not ready to pay the lump-sum amount? In some states, lenders will allow borrowers to renew or roll over their payday loans, extending the repayment period. This can be an acceptable way to go if you know you can pay the loan back after just one more payday. 

If you need significantly more time, then it might be time to consider a different loan option. Lenders who offer payday loans will typically implement additional finance charges every time you request a repayment extension. 

How to Manage Debt on Small Payday Loans

Payday loans are best for people who have immediate expenses but lack the credit or collateral required to secure a traditional personal loan. To apply and qualify, lenders only want to verify that you own a bank account and that you have a job. If you can meet those two terms, you’re usually in. 

If you only borrow what you need and you know you can pay the loan back by your next pay period, then this type of financing can be convenient and helpful. Issues begin to arise when individuals do not have sufficient funds to pay the debt back, even after getting paid by their employer. 

This traps them in a cycle of debt. They have to keep extending their repayment timeline, which heaps additional finance charges onto their loan amount. Often, borrowers have to roll over their payday loans into another type of loan so they can simply pay off the first. 

What Happens If You Default?

Defaulting on any type of loan can be a complicated situation. As with any other loan, if you miss a payment, you could face the following consequences:

• Penalties
• Fees
• Potential legal action 

Knowing this, some borrowers choose to set up their debt payment as a direct withdrawal from their checking account. This way, they can rest assured that they won’t miss a critical repayment timeline. 

The only issue? When you set your loan up this way, the lender can take the money out automatically. They may do so even if you don’t have sufficient funds in your checking account to cover the charge. This can lead to expensive overdraft fees and requires you to look elsewhere for your daily and routine expenses including food, utilities, and childcare. 

The good news? You can manage your payday loan debt. Let’s take a look at a few of the best ways to do so.

Look Into Extended Payment Plans

As payday loans can have such high interest and fees, it might be challenging to make your monthly payments and still pay for the essentials in your budget. With an extended payment plan, you can make it a little easier.

Certain states require payday lenders to offer these plans. In short, they give you more time to pay back your loan without incurring extra penalties or fees. If you’re struggling to pay off your loan, ask about this opportunity.

Keep in mind that if your lender is not required to offer this option by law, they can deny your request. However, they may offer it if they believe you may default otherwise. In either case, they may charge you a one-time fee to enter into the plan. 

Not sure if you’re in a state that mandates extended payment plans? Check the status on this website. It never hurts to ask, and you might be surprised at how willing your lender is to work with you. 

Take Out a Debt Consolidation Loan

A debt consolidation loan is a new loan that you can take out to pay off other forms of existing debt. These are designed to group multiple loans together into one big, comprehensive loan. Often, that loan will carry a lower and more affordable interest rate. 

In addition to working with lenders who specifically advertise debt consolidation loans, you can also consolidate your debt with a personal loan from your bank, credit union, or online lender. As with most loans, you’ll typically need a solid credit score to qualify for the most favorable terms and rates. 

Attend Credit Counseling

If a repayment plan isn’t an option, you can always talk to a credit counseling agency. These organizations have tools, tips, and resources that can help you get out of debt. While payday loans work a little differently, the agency can help you take measures to lower your costs, including:

• Work with your lender to negotiate a settlement
• Restructure your payback terms
• Adjust your budget to reduce other debt payments

Know When to Stop Borrowing

It can be easy to get into a cycle with payday loans, where you have to take out subsequent ones just to pay the first ones off. While this step can be a difficult one, it helps to make a strict budget and stick to it. Understand what your income is each month, and how much you’re spending on essentials and discretionary items. 

Balance your budget to ensure that your expenses are not greater than your income. If they are, then it’s time to cut something out. You can manage your payday loans on your own, but only if you have enough money each month to cover your payments. 

Commit to Paying Extra

If you’re ready to pay off your payday loan as soon as possible, the quickest way to do so is to pay extra on your monthly balance. When you do so, the extra money goes toward the principal on your loan. This helps you reduce your overall balance, which also lowers the amount of interest you’ll pay over the course of the loan. 

Manage Your Small Payday Loans Effectively

If you’re faced with an emergency expense, small payday loans can get you back on your feet. While these loans carry higher interest rates and fees than other options, they are manageable as long as you have a plan.

The above tips can help you pay off your loan as quickly as possible. With the right approach, you can be debt-free in no time. 

Interested in connecting with lenders who offer payday loans? Complete our online form to access our network of trusted providers! You’re one step closer to securing the funds you need, and we’re always here to help.