How to Avoid the Debt Trap of Payday Loans
Debt traps are dangerous for anyone, and to stay out of one requires planning. An emergency fund is critical, while making payments on time will also ensure a smooth experience.
Many people turn to payday loans when times get difficult; however, this can quickly turn into a vicious debt-building cycle.
1. Create a budget
An important first step towards getting out of debt is creating a budget, or spending plan. This document should outline your monthly expenditure and anticipated income.
Make a list of all your necessary expenses, such as rent, utilities, debt repayments, car payment payments and insurance premiums. In addition, add optional expenses like subscriptions, shopping trips, dining out and entertainment costs.
Once you understand where and how your spending occurs, set up a budget by week, month or paycheck using apps like EveryDollar to assist. Your goal should be to have enough left over money saved up or available for unexpected expenses while simultaneously lowering your credit limit to reduce debt accumulation.
2. Avoid impulsive purchases
Impulse purchases such as sales or social media ads can throw your budget off track, so be mindful about choosing purchases that align with your long-term financial goals and limit unnecessary purchases. It is alright to treat yourself occasionally; just ensure they fall in line with what is needed and don’t derail it entirely!
Consider shopping with someone you trust who can keep an eye on you while browsing social media; remove retail apps from your phone to make clicking “buy” more difficult; if impulsive spending is an issue for you, taking such steps may help keep you on budget and avoid debt traps – you’re worth it!
3. Have an emergency fund
Emergency funds can make life much more manageable when unexpected expenses arise. Instead of turning to credit cards or payday loans with steep fees and high interest rates, having an emergency fund allows for essential repairs on cars or homes as well as medical costs to be covered quickly and without using credit.
Starting small when building up an emergency fund can make saving easier and keep you on the path towards reaching your ultimate goal. Achieve one month’s expenses may be an appropriate goal to aim for, and building upon it each month. Doing this can make saving more manageable while keeping you motivated toward reaching it.
At the same time, it’s wise to store your emergency funds in an FDIC-insured savings account offering competitive annual percentage yield and no monthly fees – this way you can access it quickly in case of an unexpected emergency.
4. Avoid re-borrowing
Re-borrowing payday loan customers is common and adds up to large fees for consumers, trapping them in a cycle of high interest debt that could last months or years.
Payday lenders make most of their profit through repeat borrowers who pay fees and interest on multiple loans – sometimes up to 400% annual interest! Although advertised as quick fix consumer loans, payday lenders primarily make money through repeat borrowers who incur fees and interest costs on multiple loans – potentially totalling 400% annual interest on one loan!
Debt traps such as payday loans can drain away income quickly, forcing borrowers to reduce essential expenses in order to repay. One effective strategy to help avoid debt traps is building an emergency fund; this will allow you to avoid high-interest credit options such as payday or title loans.
5. Take control of your finances
Many individuals find themselves trapped in debt traps through unnecessary spending or failing to save enough for expenses. Breaking free from credit card or payday loan debt may prove challenging, but with proper planning and dedication towards saving, success can be achieved.
Make sure to follow through on your plan to repay a payday loan and pay at least the minimum payments on time each month to avoid additional fees and avoid falling into a debt trap.
To gain control of your finances and start saving, create a budget you can live within and begin saving with everyDollar or downloading Dave Ramsey 7 Baby Steps as starting points. These tools will give you confidence and knowledge you need to stay out of debt.
