The Consumer Financial Protection Bureau points out that there is no set definition for a payday loan, which means you’ll need to look to your lender to determine exactly when the full repayment for the loan is due. In most cases, however, payday loans are due when a person receives their next paycheck. If borrowing from a different source, such as Social Security, one may have as many as four weeks to pay back the loan. What happens if you don’t have the money to repay the payday loan on the due date? Can you get an extension?
Rolling over a payday loan verses getting an extension
Depending on the state in which you live, and the policies put in place by your lender, you may have the option of rolling over the payday loan or getting an extension. It’s important to note that the two options are not the same thing.
With a payday loan rollover, the borrower is required to pay an upfront fee for additional time to come up with the total payment. The lender may change the terms of the loan at this time, including increasing the interest rate. The borrower will be required to sign a new loan agreement, as the old loan is now rolled into the new one.
With an extension, the borrower is simply granted additional time to repay the original payday loan under the original loan agreement’s terms and conditions. You may be asked to sign an amendment that includes the new payment due date.
Can you get an extension without penalty fees?
If a payday loan lender is reputable, there’s a good chance they are a member of the Community Financial Services Association of America (CFSA). This organization requires its members to allow borrowers to request one payday loan extension every 12 months at no additional cost. The Extended Payment Plan (EPP) will be approved, no matter what the reason is for your inability to pay.
Consumers should take the time to read the CFSA’s Customer Bill or Rights before requesting an EPP. The company recommends contacting your lender the business day before the loan is due to request the EPP, as an amendment will need to be signed. The agreement will spell out the repayment plan, as well as list any consequences should you default on the loan. For example, you may be required to pay a fee if you miss one of the payment due dates. The balance of your payment may also be accelerated.
The fees and hidden costs to beware of when rolling over a loan
Although there are no hidden costs associated with a payday loan rollover that is conducted through a reputable lender, there are fees you’ll have to pay when agreeing to this type of loan. Depending on the lender, you may have to pay a set fee for the rollover, which still includes your principal and ongoing interest charges, or you may have to pay a set fee plus an increased interest rate. All of the fees should be clearly spelled out in your rollover contract.
Why you should avoid rolling over a payday loan
There’s good reason why many states ban payday loan rollovers and why others put strict limits on them. The Federal Reserve Bank of St. Louis reported that the average payday loan interest rate is 391%. That means if you took out a payday loan of $400, you’d have to pay a fee of $60. Since most payday loans are due on your next payday, you’ll owe $460 within just a week’s time. If you rollover that payday loan, you’ll incur at least another $60 fee (some lenders may charge even more than this). Now your total amount due is $520. Most likely, that amount is again due on your next payday.
Rolling over a payday loan keeps you in a cycle of debt that continues to accumulate. Within just a month or two’s time, you’ll begin to find this cycle impossible to break.
Ways to avoid rolling over a payday loan
Fortunately, there are better alternatives to rolling over a payday loan when you need extra cash.
- Take out a credit card advance. According to CreditCards.com, the average interest rate for a credit card cash advance is 24.80%, which is a heck of a lot more affordable than 391%.
- Apply for a personal loan. Personal loans require you to prove that you can repay the loan; however, if you do qualify for one, you’ll find their interest rates are often quite low. Bankrate lists the average personal loan interest rate as of July 2020 as 11.91%
- Apply for a paycheck advance. Instead of taking out a payday loan, you can go directly to your company’s HR department and request a paycheck advance. The company may authorize the advance without any interest fees, although some businesses charge a small interest fee for the service.
- Borrow from a friend or family member. While it may be difficult to gather up enough courage to ask a friend or family member for a loan, it won’t cost you as much as a payday loan. Friends and family are also more likely not to charge interest or give you a quick repayment deadline like you’d get with a payday loan.