When Minnesota resident Sherry Shannon was short on cash after her car broke down in 2013, she turned to a storefront payday lender for a $140 loan. She remembers the process as quick and easy — she signed on the dotted line, got the cash and was out the door within minutes.
But when it came time to repay, the combination of her monthly bills, plus the triple-digit interest rate on her payday loan, meant she was short on cash again, so she took out another loan.
As the amount she owed ballooned, Shannon says she soon felt trapped by her debt.
"I experienced homelessness once, and I didn't want to be homeless again, so I had to keep taking [payday loans] out just to pay my rent and my light bill," she says. "I didn't see any way out of this."
A Minnesota law restricting payday loan rates took effect Jan. 1, 2024, but Shannon's story doesn't stand alone. About 12 million Americans use payday loans each year, according to research from the Pew Charitable Trusts. Though these loans may be advertised as a way to cover a one-time emergency cash shortage, borrowers often use them for important recurring expenses such as rent and utilities, and the cost can be exorbitant.
If you're trying to get out of payday debt, there are ways to break the cycle, especially if you know where to turn in your community.
How payday loans work
Payday loans are short-term, small-dollar loans typically capped at $500. They're considered high-interest because of their fee structure.
A typical two-week $100 payday loan comes with $15 in fees — which equates to an annual percentage rate of 391% — according to the Consumer Financial Protection Bureau (CFPB). Financial experts consider 36% the maximum APR a loan can have to be affordable.
Because payday loans are relatively easy to get, they can also feel like a surefire solution to an urgent financial problem, says Anne Leland Clark, executive director of Exodus Lending, a nonprofit based in St. Paul, Minnesota, that helps families break out of predatory loan debt. But when people can't repay, their financial situation becomes more precarious.
"Payday loans may provide immediate relief in a financial crisis or a financial trauma, but then it almost retraumatizes you," Clark says. "It causes more stress, and people fall into a cycle where they aren't able to catch up."
The payday loan debt cycle
A debt cycle is when repeat borrowing leads to an ever-increasing debt that may demand even more borrowing to manage it.
According to 2014 research from the CFPB, four out of every five payday loans are reborrowed after the initial two-week term. The CFPB's research also shows that most borrowers end up owing more in fees than the original loan amount.
That was the case with Shannon. Though her initial loan was $140, she eventually paid $500 in fees while making little progress in paying down her principal loan amount.
The quick turnaround time on payday loans is part of why they're so hard to repay, says Clark. Chances are, if you're short on cash when you borrow, you'll still be short on cash two weeks later when you have to repay the loan in one lump sum plus the interest you owe.
If borrowers can't repay, they may be able to renew the loan depending on their state. However, renewals require an additional fee, making it that much harder to catch up when the loan comes due again.
"Even when people feel like they're making progress, they're not actually paying down their loans," says Yasmin Farahi, deputy director of state policy and senior policy counsel at the Center for Responsible Lending in Durham, North Carolina. "That's how the cycle continues. They're paying some amount, but it's not enough to get them out from under this."
Did you know...
Payday lenders in sixteen states are required or allowed to provide extended payment plans to borrowers who request them, default or are at risk of defaulting, according to a 2022 report from the CFPB. Extension rules vary by state. These states include: Alabama, Alaska, California, Delaware, Florida, Idaho, Indiana, Louisiana, Michigan, Mississippi, Nevada, South Carolina, Utah, Washington, Wisconsin and Wyoming.
Clark and Farahi emphasize that borrowers shouldn't feel ashamed for being stuck in a payday loan debt cycle. Though consumer finance education can help, they say greater regulatory efforts are needed to address the issue truly.
"It's important for consumers to understand that this is really a policy problem," Farahi says. "It's up to policymakers to ensure that we're getting rid of these kinds of loan sharks, not up to consumers to learn how to swim with the sharks."
Breaking free of payday loan debt
Shannon eventually found her way to Exodus, which offered her a zero-interest, 12-month loan to refinance her payday debt.
She's now free of payday loans but wants others to know how easy it is to become trapped. Though Shannon admits it's hard to do, she says the key is reaching out for help before the loan gets out of control.
If you're struggling with payday loans, consumer advocates strongly recommend exploring the options below to help you pay off the debt.
» MORE: Alternatives to payday loans
Research organizations in your area that offer financial assistance
Your city or state may have organizations that provide financial assistance to community members in need. Look for nonprofits, charities and religious groups. Some organizations may specifically address payday debt, like Exodus does in Minnesota, while others may offer general financial assistance to help cover necessities, such as rent or groceries. Use the money you save on those expenses to pay off your payday debt.
Reach out to a nonprofit credit counseling agency
Credit counseling agencies specialize in helping people with their finances, including getting out of debt. Credit counselors can work with you to create a budget, manage your bills and explore your debt payment options, including a debt management plan. With a debt management plan, you pay the credit counseling organization, which then pays off your creditors and may charge you a fee.
Look for a reputable nonprofit credit counseling agency through the Financial Counseling Association of America or the National Foundation for Credit Counseling. According to the CFPB, a reputable organization should send you information about their services for free so you can decide if it's the right fit.
Take out a small-dollar loan from a credit union or bank
More credit unions and banks are offering small-dollar loans. These loans could help you pay off payday debt and be left with a more affordable loan instead.
Your neighborhood credit union is a great place to start. Though you'll need to become a member before applying for a loan, membership is easy and affordable at most credit unions. Some federal credit unions also offer small loans, including payday alternative loans or PALs. These loans can range from $200 to $1,000 and cap borrowing costs to keep the loan affordable. You'll need to be a credit union member for one month before applying. However, some credit unions offer a second type of PAL that allows you to apply immediately and has higher loan amounts.
Some banks also offer small-dollar loans, though you'll need an existing account in good standing to apply. Even if your account isn't in good standing, it doesn't hurt to call the bank, explain your situation and see if they're willing to offer you a loan.
Borrow money from a family member or friend
If you're unable to get help from an organization or financial institution, don't be afraid to tap your network. It can be hard to ask a family member or friend for money. Still, you can make it more comfortable by writing down mutually agreed-upon loan terms — including when and how you'll pay them back and if you'll pay interest — so the expectations are clear.
Many people find themselves in financial trouble at one point or another, so remember that getting back on your feet means you may be able to help someone else in the future.
