Payday loans are short-term consumer lending products that can carry high fees, especially when measured as an annual percentage rate of interest. A $100 payday loan with a $15 borrowing fee and 14-day repayment term equals 391% APR.
One of the risks of payday loans is they can fuel a cycle of debt. Getting out of a payday loan is something a borrower can explore. Below we highlight how you may consolidate payday loans into something more affordable for you.
Related: Credit card charge offs explained
What Is a Payday Loan?
A payday loan is a short-term consumer lending product of less than $1,000 that charges high fees for every $100 borrowed. The repayment term of a payday loan may range from 14 days to 60 days.
Payday loans are generally provided by alternative financial service providers who may charge $10 to $30 for every $100 borrowed. Fees of this magnitude can amount to 261% to 782% APR on a 14-day payday loan.
Borrowers at the end of their payday loan term can repay the loan in full or receive a rollover extension that extends the term. Rollover extensions can fuel a cycle of debt, because rollovers may charge new fees in addition to the original costs of the loan.
How Do Payday Loans Work?
Payday loans work by providing borrowers with up to $1,000 and an obligation to repay the loan in a matter of days or weeks. A private lender may charge $10 to $30 for every $100 borrowed when disbursing payday loans.
Interest Rates
As mentioned above, private lenders may charge $10 to $30 for every $100 borrowed when disbursing payday loans. Fees of this magnitude can amount to 261% to 782% APR on a 14-day payday loan.
Examples
A lender can offer a $100 payday loan requiring the borrower to repay the $100 plus a $10 borrowing fee in 14 days. Repaying $110 on a 14-day payday loan that provided $100 in principal amounts to about 261% APR.
The same lender can offer a $300 payday loan requiring the borrower to repay $300 principal plus a $90 borrowing fee in 14 days. Repaying $390 on a 14-day payday loan that provided $300 in principal amounts to about 782% APR.
You may calculate the APR of a payday loan by following this formula:
- Divide the borrowing fee by the principal loan amount
- Multiply that figure by 365 days in a year
- Divide that figure by the term of the loan
- Multiply that figure by 100
When considering a $300 payday loan with a $90 borrowing fee and 14-day repayment term, the above formula calculates the APR as about 782%.
Consolidating Payday Loans
Consumers can use other financial products for consolidating payday loans. Borrowers, for example, can take out a personal loan and use the funds to pay off payday loans in full. Consumers in that case would replace their payday loan liabilities with personal loan debt.
One of the benefits of a personal loan is it’s a consumer lending product that can be used for many purposes. Debt consolidation is one of the top reasons to apply for a personal loan.
The average interest rate on a 24-month personal loan in the fourth quarter of 2021 stood at 9.09%, according to Federal Reserve data. Payday loans typically include high fees when measured as an annual rate of interest. Consolidating payday loans with a personal loan may help borrowers minimize their costs.
Personal loans in some cases can include high fees. Among the disadvantages and advantages of personal loans include their potential to include high origination fees as a con and their potential to help consumers build credit as a pro.
When comparing payday loans vs. personal loans, it’s clear that payday loans cannot meet your needs if you need to borrow more than $1,000. Among the personal loans that are unsecured with no collateral requirement, a consumer may need good credit to qualify for large loan amounts.
Avoiding Payday Loans
Payday loans may provide quick cash, but avoiding payday loans might be best if you can qualify for other forms of financing. As mentioned earlier, private lenders may charge $10 to $30 for every $100 borrowed when disbursing payday loans. Fees of that magnitude can amount to 261% to 782% APR on a 14-day payday loan.
The average rate on U.S. credit card accounts assessed interest in the fourth quarter of 2021 stood at 16.44%, according to Federal Reserve data. Payday loans compared with credit cards generally feature much higher APRs than revolving credit products.
The Takeaway
Borrowers may have options on how to get out of payday loans. Borrowing money may help you meet your goals, so finding the best terms and conditions for you might be the best way forward.
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This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
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What happens to your debt when you die?
Do you know what will happen to your debt when you die? Some debts are forgiven while others may be passed down to heirs. Read on for the answers to some of the most frequently asked questions related to death and debt.
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In order to accurately answer this question, we need to examine the most common types of debt people accumulate. In other words: Not all debt is equal. The type of debt you have and when you accumulated the debt will determine how and if your debt is passed on to others when you die.
The Most Common Types Of Debt
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If you die with credit card debt, there are two things that may happen:
- Your debt may be forgiven and written off by the credit card company
- The debt will be passed on and the responsibility of a survivor
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If you are the sole owner of the debt when you die, (not married or a cosigner) the credit card companies will be involved in the probate process. The money left in your estate, any retirement accounts, or other items worth money will be sold and the outstanding debts will be paid.
If there is not enough money in your estate to pay off the remaining credit card balance, your children or beneficiaries will not be required to pay the remaining balance. The outstanding debt will be “forgiven” by the credit card company.
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If the credit card is a joint account with a living spouse or a cosigner, the other account holder will be responsible for the debt. If you have authorized users on the account but they are not the account owner, the users will not be responsible for the debt.
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This is one of those myths that continues to live on. Credit card debt does not go away after seven years. The confusion with the seven-year time frame comes from the credit report time requirement.
After seven years, old debts begin to fall off of your credit report. Your debt, however, is still very much alive and owed. Lenders can and will continue to pursue the amount owed until it is paid, settled, or charged off. Do not be fooled into thinking your credit card debt will go away after seven years.
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The quick answer? It depends. There are several factors that determine if a deceased spouse’s credit card debt will be passed along to the surviving spouse. If the credit card debt was incurred before marriage and the deceased spouse was the sole owner of the account, in most cases, the debt will not be the responsibility of the surviving spouse.
If the credit card debt was incurred after marriage and the deceased spouse was the sole owner of the account, the state you live in determines the surviving spouse’s responsibility. If you live in one of these community property states and the debt was incurred after marriage, the surviving spouse is responsible for the credit card debt of their spouse regardless of the account ownership:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
If you do not live in one of these states, generally the surviving spouse will not be responsible for the credit card debt if they were not a joint owner of the account. If you are a joint owner on the account, you are now solely responsible for the debt.
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Again, where you live determines what can happen to your medical bills when you die. Generally speaking, children and heirs will not be required to pay back the outstanding medical bills of their parents. With that being said, there are a couple of instances where a child could be responsible for the medical debt of their parents.
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When a child cosigns admission paperwork acknowledging financial responsibility if the adult is unable to pay their bills, this debt may be passed down to the child.
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There are 26 states that have filial responsibility laws that state a child may be responsible for a deceased parent’s medical debt in certain situations. The states that have filial responsibility laws are:
- Alaska
- Kentucky
- New Jersey
- Tennessee
- Arkansas
- Louisiana
- North Carolina
- Utah
- Indiana
- Nevada
- California
- Maryland
- North Dakota
- Vermont
- Connecticut
- Massachusetts
- Ohio
- Virginia
- Iowa
- New Hampshire
- Delaware
- Mississippi
- Oregon
- West Virginia
- Georgia
- Montana
- Pennsylvania
- South Dakota
- Rhode Island
Now, before you become overly concerned about living in one of these states, understand that the enforcement of filial responsibility laws is extremely rare. If you have significant medical debt, consult with an attorney in your state to see exactly what responsibility your adult children may be required to pay back.
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Student loan debt may or may not be passed on to survivors when the borrower dies. What happens to the loan depends on what type of loan was taken out and when it was established.
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If you have federal student loans, they will be forgiven upon death. Federal student loans do not pass on to others as long as a death certificate is presented to the lender. Federal student loans that fall into this category are:
- Direct Subsidized Loans
- Direct Consolidation Loans
- Direct Unsubsidized Loans
- Federal Perkins Loans
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On Nov. 20, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was amended. The added section releases cosigners of a private student loan from financial responsibility if the primary borrower dies. Due to this, all new private student loans with cosigners are not required to repay the loan upon the student’s death.
However, student loans with cosigners taken out before Nov. 20, 2018, may still require the cosigner to be held responsible for the debt.
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Federal Direct PLUS Loans are also forgiven upon the student’s death. In the past, the parent who signed for the PLUS loan was required to bear the burden of the tax responsibility and file the forgiveness as “income” after a child’s death.
Currently, The Tax Cuts and Jobs Act of 2017, is in effect and releases parents from this tax responsibility. This tax stipulation remains in effect until the year 2025.
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There is several different scenarios involving vehicle loan debt upon the borrower’s death. If the auto loan has a cosigner or the vehicle was purchased in a community property state after a couple was married, the cosigner or spouse is responsible to repay the auto loan.
If the loan was obtained before marriage and is only in the deceased spouse’s name, generally the surviving spouse is not held responsible for the debt. The bank will take possession of the vehicle to settle the outstanding debt or the surviving spouse can pay off the vehicle loan.
If the borrower is not married, the survivors can either pay off the vehicle loan and keep the vehicle, sell the vehicle and pay off the loan or return the vehicle to the bank. Heirs do not inherit vehicle loan debt.
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Payday loan debt is very similar to credit card debt when you die. If there was not a cosigner or someone else listed as jointly responsible for the loan, then the company writes off the debt as a loss. Payday loan debt is not transferred to heirs but may be the responsibility of a surviving spouse if the debt was incurred after marriage in a community property state.
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In probate, the home must be paid off with the funds from the estate or the mortgage company must agree to let someone else inherit the loan. If you still owe money on your home, your spouse or heirs usually have three separate options:
Option 1: Sell the home to pay off the outstanding mortgage. The executor of the will can initiate a home sale to fulfill the outstanding debt obligations. If the home is not worth what is owed, additional money from the estate will be used to pay off the mortgage. If additional money is still required, the bank can take possession of the property.
Option 2: If there is enough money in your estate, your heirs can use that money to pay off the mortgage. Or the beneficiaries can use their own money to pay off the loan in full.
Option 3: If there is not enough money in the estate to pay off the loan, an heir may elect to contact the lender in an attempt to take over the loan. The loan would need to be transferred into the new borrower’s name which would require the heir to meet the credit obligations for a loan.
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Lenders can force the sale of a property to fulfill the outstanding equity loan balance if the estate does not have enough capital to pay it off. This is another scenario where the heir may be able to apply with the lender to take over the payments.
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If you have federal tax debt when you die, the IRS gets the first chance at your estate. Legally, the executor of the state is unable to pay any other debt or obligation until the federal tax debt is settled.
If a substantial amount is owed, the IRS will quickly put a lien on any property owned by the deceased in an attempt to satisfy the debt. The federal government will get their money one way or another – but the heirs will not personally be liable for the outstanding tax debt.
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There is not an automatic notification process when a person dies. The next of kin or executor of the state is required to contact the bank and provide a copy of the descendant’s death certificate.
When the death certificate is presented, the financial institution will freeze all of the associated accounts until the probate process is completed. If money is not owed to other lenders, the beneficiaries will be given access to any monies left in the deceased person’s accounts.
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Even though most debts will not be passed on to your heirs when you die, you may not want them to deal with the hassle of paying off all your debt with your estate – only to be left with nothing.
If you have struggled with debt your entire life, a cheap term life insurance policy may be an option to leave a small inheritance to your heirs. Most life insurance policies are dispersed tax-free and are not accessible to creditors.
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Leaving debt behind is a fear many seniors face. On the bright side, your heirs will usually not be personally responsible for paying off your outstanding debts. However, the sooner you can clean up your own financial mess, the better.
Do your best to start paying off your debt so your executor is not faced with a long probate process. If you need help getting started, check out this related post The Debt Payoff Playbook.
This article originally appeared on Arrest Your Debt and was syndicated by MediaFeed.org.
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