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Avoiding the rollover trap

A payday loan can often seem like a super-convenient way to borrow. Obtaining a relatively small, short term loan to get out of a temporary financial squeeze — without a lot of hassle or credit checks — sounds good when you’re in a bind. However, the amount of money involved can spiral into an increasing pile of debt if things don’t go as you planned.

One of the pitfalls of taking out this type of loan is that, in spite of your best intentions, you may not be able to pay it off by the due date. When this happens, it is very tempting to “roll over” the loan, meaning to extend it for another month.

Pitfalls of rolling over your loan
Rolling over a payday loan does not make it go away. Instead, repayment is just delayed for a certain period. You will still have to come up with the cash eventually. On top of that, you will be charged an extra fee for the loan rollover, as well as additional interest for the extended period.

This means you’ll have more money to pay out and more temptation to roll the loan over for yet another month. Watch out that you don’t get caught in the trap of paying off just the interest and finance charges, while continuing to roll over the principal loan amount.

When your state bans or limits rollovers
Some states have put legislation in place to ban payday loan rollovers. The problem with this is that borrowers can get around the ban by paying off their loan amount in full, and then immediately initiating a new loan (called a back-to-back or serial loan) with the same lending institution. Alternatively, they may borrow from a second lender to repay the first.

Other states attempt to limit rollovers. Their laws may either restrict borrowing more money from a particular lending institution in order to repay an existing loan, or call for a “cooling off” period of 24-72 hours between loans.

Longer term solutions
Banning or limiting rollovers does not solve personal financial problems any more than rolling over a payday loan helps to get it paid off. If you find yourself struggling to balance your budget and pay for necessities every month, look for some longer term solutions.

Meet with a financial counselor or use an online credit counseling service to figure out how to cope with your debts. You may be able to negotiate with your creditors to come up with a payment plan that gives you a little breathing room. Alternatively, you might qualify for emergency financial aid through your local social service agency or religious institution. Your financial counselor can also guide you in making a workable household budget.

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Grace Chen
Grace Chen - Writer & Editor
A graduate of the Haas School of Business, University of California, which is one of the top three (3) business schools in the U.S., Grace Chen has 10 years of experience in this field and have been delivering stellar business content through her written word. She’s the chief editor of Communicate Better and has written and edited thousands of content published in various online and printed media, including the NYSE-sponsored research studies and MEC Global. Connect with Grace on LinkedIn, https://www.linkedin.com/in/grace-chen-9254ab8/