A lot of people are stuck in a cycle of using Pay-Day and Checking Cashing stores, and they don’t know how to get out of them. First let’s understand how they work to both help people then trap them in an ever ending cycle of debt and pain.
- Loan is given, equal to one or two paychecks, and is automatically deposited into checking account
- Borrower uses those funds for things like food, utilities, rent and gasoline and there is no money left in checking account
- Paycheck is deposited from the employer automatically into the employees/borrower’s checking account
- A few days later the pay-day advance company is repaid back for a portion of the loan amount, through an automatic checking account draft, the amount re-paid sometimes equals the paycheck, plus a fee (very large fee when you compute it as interest) so the person is often left with no money for the next round of bills they owe
- The cycle repeats itself, the borrower is going to be short again, so they receive the loan, sometimes automatically, then repeat the above
Question: I need the money to pay my bills, how can I stop the cycle?
Answer: The keys are for your expenses to be less than your income each month, and for you to have around $500 extra as a cushion for things that fluctuate a little bit like for food and gasoline, so that you are not bouncing any checks or tempted to go to the pay-day-loan store for an advance on your paycheck. Then you want to have at the minimum $1,000 emergency savings in your savings account that is only used for dire emergencies. Make sure that you look at your expenses and cut everything or substantially reduce all unnecessary expenses until your income exceeds your expenses. After you have your savings established, use all disposable income to ‘snow-ball’ debt until all non-mortgage debt is eliminated.
Once you don’t need the pay-day advance cancel it, and all automatic checking account deposits and drafts so that no more money flows to or from the check advance place.
Question: I don’t make enough money, how can I break the cycle?
Answer: Get second jobs, sell things- do whatever you can to pay the loans off.
Question: I’ve done all of that and I can’t get ahead, what should I do?
Answer: Cancel the automatic checking account draft, so that they can’t pull the money from your checking account. Sometimes they are uncooperative, and you have to get tough. Sometimes you need to give them a 10 day or so lag time. If all else fails contact your bank and discuss with them cancelling the draft on the banks end before it hits. Some people cancel the bank account, but you might be faced with bounced check and other service fees. Make sure you contact the lender to arrange a monthly payment plan that you can afford, until it is repaid