In tough economic times, it’s tempting to take out a payday loan to tide you over until your next paycheck. To avoid the trap of high interest and fees associated with refinancing, it’s best to be certain you can pay back the loan before giving in to temptation.
How Payday Loans Work
When you obtain a payday loan, also known as a cash advance loan, you are basically cashing a post-dated check. The check covers the amount that you’re borrowing, plus a finance charge for borrowing the money -- usually $15 or more. The lender agrees to hold the check until your next payday, at which point it will deposit the check to get back the money you borrowed. At least, that’s how it works in theory. More often than not, the reality is that borrowers don’t have enough in their checking accounts to pay back the loan and are forced to roll over or refinance the loan, incurring additional fees and exorbitant interest rates.
Rollover, Renewal and Refinancing
Renewing, refinancing or rolling over your loan all basically refer to the same practice of obtaining a new loan from the lender and using part of it to pay the finance charges on both the old and new loans. The details of this process are governed by state law, which varies from state to state -- and some states prohibit this type of lending altogether. Some states require that you also use part of the new loan to pay some or all of the principal on the old loan. Most states also impose limits on how much you are allowed to borrow with each loan, as well as limits on how many times you can roll over your debt to a new loan. You can find a chart that lists the laws and limitations regarding payday loans in each state on Bills.com.
Depending on your state, you might be able to refinance your loan into an installment loan, which offers both a higher loan amount and a longer period of time to pay it back in regular installments. As with rollovers, you must use part of the loan to pay all outstanding and current finance charges, and in some states you must also use it to pay part or all of the outstanding principal. Installment loans often incur even higher interest rates than standard payday loans, according to ProPublica.org, and they are secured with collateral such as your car or any property you own.
If You Can’t Pay
The problem with refinancing payday loans is that the finance charges and interest can quickly add up to overwhelming debt, and eventually you run out of opportunities to refinance. If that’s the case, some states require payday lenders to offer an installment plan to pay back your outstanding debt. However, if you don’t live in one of these states, or if you still can’t afford the payments, the lender is able to pursue collections just as with any other type of debt, according to Bills.com.
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