The key to making payday loans work for YOU, and for staying clear of the dreaded debt cycle, is simple. You need an exit strategy. Taking out a loan is like joining the military, or working for Don Corleone… it’s a lot easier to get into it than to get out of it.
The problem many people face when borrowing money, especially when taking out a payday loan, is that they don’t plan ahead. They just take what they need, and then figure out repayment on the fly.
This is how you get trapped in the debt cycle! If you are taking out a loan, have an exit strategy. This way you can pay it off and put it behind you using a little time and money as possible.
What is the Debt Cycle?
Most forms of short term borrowing (also called small dollar loans) are considered “revolving debt.” Where a bank loan or an installment loan have set rates and due dates, revolving debt features variable rates, and no fixed end date.
Like a credit card, the interest and fees for a payday loan can keep on growing indefinitely. This is how the debt cycle thrives, by piling up those fees until you can’t possibly pay it all off.
Don‘t get trapped in the debt cycle!
What is Your Exit Strategy?
Before you borrow a single dollar from a lender, you need to look ahead and visualize how you are going to pay it back. That $100 loan you got might turn into a $1000 worth of payments if you don’t take care of it quickly.
Payday loans are based on your pay dates. So chart them out on a calendar (or the calendar app on your phone). This way you have an idea of how much money is coming in, and when it will hit your bank. The lender will know all of this, and you should at the very least have the same info as your lender.
Now what is your plan? Can you pay the whole loan back off the next check? That is the optimal solution when borrowing. Pay it off as quickly as possible!
If you can’t pay it off at once, then you need to look at how much more the lender will charge you. Schedule your payments, keep close watch on your finances, and stay one step ahead of the lender.
No one is going to do this for you. It benefits the lender for you to take a long time paying them back. That’s how they make their money! So be cautious, be smart, and have an exit strategy for the debt cycle.