Payday loan companies often sell their services by emphasizing their payday loan credit repair capabilities. Take out a payday loan, repay it within a week, and it will be put down as a plus in your credit report, the borrower is told. Should you be resorting to payday loans as a method for credit repair?

Payday loan credit repair sounds attractive because this short-term loan can be paid within a week. So with multiple payday loans, credit repair takes as little as six months, the argument goes. There is a catch. Very few borrowers manage to repay this loan at the end of the first week.

What happens if you cannot repay the payday loan debt? The lender will offer an extension. Sounds too good to be true? It probably is. Every time the loan term is extended, the interest rate increases. Why should the borrower worry about the interest rate?

The reason is that a payday loan interest rate can be very high. In terms of APR, this is as high as 500% annually. For each $100 you borrow, the creditor levies $15-$20 as fee. When you fail to repay the loan, the fee is doubled. At the end of a few weeks, you can expect to pay more than $100 on the original loan amount of $100. Not only have you failed to repair your credit record, you are now saddled with a loan whose interest rate increases rapidly. This is sure to affect the borrower’s credit record further. Payday loan credit did not help; it just made things a lot worse.

Why are so many borrowers unable to repay this loan at the end of the stipulated period? Most people who borrow cash advances do not have savings or any other way to get quick cash during emergencies. Their paycheck does not cover their expenses. When they take out a payday loan, they are putting further strain on their already fragile resources. Not only must they repay the money they needed to borrow in the first place, but they must also pay high interest rates.

For many debtors, this starts out innocuously. They are able to repay the first loan and are back in a few weeks to borrow a second payday loan, confident that repayment is easy. However, the high interest rate is beginning to impact their bank balance. Soon, checks start bouncing and the creditor charges penalties, which further damage the debtor’s savings. Payday loan credit repair begins to appear a distant dream.

Dealing With Payday Loan Debt

Now that you have a high interest loan to repay, how should you deal with the situation? Start by contacting a debt consolidation company. Explain why you took out the loan and your goal of payday loan credit repair. They will ask you about your income, education, home ownership, and credit record. Then they will negotiate with the lenders to lower interest rate and grant an extension that enables you, as a debtor, to clear your debts. The debt consolidation company’s goal is to help you clear payday loan credit debt, manage your expenses without requiring a payday loan in future, and repairing your credit record without getting further mired in debt.