Should You Borrow A New Loan To Pay Off Payday Loans?
People who face great difficulty in managing their pay day debts because of lack of fund often tend to borrow a new loan to pay off payday loans. Whether this strategy is good or bad depends mainly on the type of loan you borrow for this purpose. Since you are already heavily in debt with payday loans, the very idea of borrowing a new loan does not seem to make much sense in the first look. But, if you do some planning and research work in advance and get the right type of loan, the idea can really work. Following is a brief rundown on the pros and cons of some of the common options in this regard.
Borrowing A New Payday Loan To Pay Off Existing Ones
This is probably the easiest and quickest option for you. But, it is very important for you to understand that borrowing a new payday loan to pay off payday loans is not a wise choice. Those who go for this option often end up getting their finances damaged more severely. This strategy may help you pay down a certain part of your existing payday debts, but it is just a very temporary solution. The eventual outstanding debt balance will only keep on increasing rapidly with every passing month. The debt burden on you will only increase with time; it can never decrease with this strategy unless you win a lottery and eliminate all your debts all at once.
A simple example will help you understand how borrowing a new payday loan can never be a good idea to pay off payday loans. Suppose you have borrowed $500 and you are required to pay back $550 (including interest and other charges) on the next pay day, which is often the due date for such loans. If you do not pay in time, certain penalty is charged to your debt account, say another $50. This way, the outstanding balance now jumps to $600. In fact, additional interest charges also apply for every single day after the due date, at the same high rate. It means if you want to obtain a new loan to get rid of this existing debt burden, you will have to borrow more than $600. For this new loan, you will again be required to pay a much higher amount on the next pay day, which can be up to $750 or even more. If you continue with this strategy for three to four months or even for a longer period of time, you can easily end up accumulating thousands of dollars of debts while the harsh fact would never change – that you had initially borrowed only a meager $500. It turns into a vicious cycle of debts.
It is very important for you to understand that even payday lenders often encourage borrowers to obtain a new payday cash advance to pay off the existing debts. This is how their real revenue generates. That is the very reason why they are often termed as predatory lenders.
The conclusion is that borrowing a new payday loan when you are already heavily in debt with multiple payday loans is a bad idea. You should never go for that.
Borrowing A Conventional Loan To Pay Off Payday Debt
This strategy is much safer. In fact, if the total amount of payday debt you owe is not excessively very high, there just cannot be a better strategy than this. You can understand it better with an example. Suppose you currently owe $3000 to multiple payday loan companies. If you are a home owner and are fortunate enough to have that much equity in it, you can consider borrowing a home equity loan of $3000. Since it is a secured loan, you can easily be offered this loan at a comparatively very low rate, which is almost negligible as compared to the extremely high 3-digit APR that payday lenders charge. Where the interest rates on payday loans can be as high as 750% per annum, the rates for home equity loans usually range between 12% and 20% per annum. The biggest advantage with this strategy is that this new loan allows you to pay back in very small monthly installments over several years. This way, you can easily pay off your pay day debts using the money thus borrowed and start rebuilding your finances with better control on your debts.
If you cannot borrow a home equity loan, you can consider borrowing an unsecured personal loan. The only situation when this strategy may not make sense is when you already owe tens of thousands of dollars in payday debts. It is never easy to borrow that high an amount through conventional loans. Even if you succeed in borrowing one, you will still face great difficulty in paying it back.
Therefore, if this strategy does not seem viable for you because of one reason or other, you are advised to consider the third strategy, which has been described below.
Borrowing A Debt Consolidation Loan To Get Rid Of Pay Day Debt
The beauty of debt consolidation lies in the very fact that it can help you get rid of your payday debt problems even if you owe more than $10,000. You just have to find a reputable debt consolidation company and they can even help you reduce your debt burden by up to 50%. Following is an example on how it might work.
You contact a debt consolidation company. They review your finances and then suggest you a plan accordingly. The plan sounds sense to you and you show your interest in that
plan. The company then contacts your lenders and tries to negotiate a repayment deal in your favor, something you can easily afford. Now, the big question that might hit your head is why in the world your lenders will agree to write off 50% of the debts. Well, this is very much possible. As you saw in above examples that even a $500 of small payday cash advance can turn into thousands of dollars of debts within a few months. If you go bankrupt, it is not in the best interest of your lenders. They will lose all their money. Therefore, through effective negotiation skills, they can be convinced to write a large part of the outstanding balance off because they will still be making a lot of money that way. The debt relief professionals in reputable debt consolidation companies are smart negotiators.
After the negotiation step, a final contract is prepared, where you agree to pay single monthly payment (which is something you can afford to pay easily) to the debt consolidator who in turn pays off your respective creditors as per the negotiated agreement with them. This way, the debts becomes easily manageable for you and you can again start working on to improve your finances.
Overall, when it comes to borrowing a new loan to pay off payday loans, you must do a thorough brainstorming and look into all the options available to you.
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