Before we jump into what a payday loan cycle is, let’s first establish what a payday loan is and why you should be wary of them.

A payday loan is a short-term loan (typically two weeks) that amounts to typically no more than $500. The key perk to a payday loan is that it gives you access to cash quickly, and you can attain one even with a poor credit score or low income (ie: payday loans online for bad credit).

These perks are also the cause of a couple of drawbacks though. Because the lender takes on the brunt of the risk and loans are unsecured, payday loans come with steep fees and high-interest rates. Not only are interest rates exuberant, but payday lenders also have the ability to take money from your bank account should you default. A personal loan or credit card will most likely be the better option if you can swing it with your credit score.

Someone might opt for a payday loan if they have a poor credit score or they want to avoid hard credit checks that could further damage their score. Keep in mind though that there are some lenders out there who perform only soft credit checks, meaning it doesn’t negatively impact your credit score.

The real issue with payday loans is how they trap borrowers in a loan cycle. When you’re trying to juggle a short-term loan that has a sky-high interest rate, it can be difficult to make on-time payments in full. When this happens, you’re charged a ‘rollover’ fee to extend the loan, making the repayment process even more challenging. And once you roll over the loan once, it becomes easier and easier to do it again. And as this balance is mounting, your credit score is plummeting. A payday loan debt cycle turns that two-week loan into a loan that carries on for months and months, potentially accumulating into foreclosure or bankruptcy.

The whole business model of a payday loan is set up to make loans that borrowers can’t pay back without re-borrowing. Lenders actually make 75% of their money from borrowers that are stuck in over 10 loans per year. Just having a payday loan increases your likelihood of bank penalty fees, bankruptcy, delinquency on bills, and account closures.

The debt cycle associated with payday loans isn’t intricate, but it can be psychologically taxing. Since payday lenders are for-profit businesses, it’s in their best interest that you default on your loan and have to pay extra fees. Here’s how it works:

1. To take out a payday loan, you must write a check dated for the next payday.
2. The check is cashed on that payday, prior to the borrower buying groceries or paying for bills.
3. High-interest rates and fees make it almost impossible for borrowers to cover normal living expenses while still paying off their payday loans.
4. To make ends meet, the borrower takes out one loan after another, racking up fees as they go.

Aside from preventative measures–like teaching children best practices for personal finance while they’re in school–there are a couple of ways to get out of a payday loan cycle when you’re already in the thick of things.

The first option is to ask for help from a family or friend. If they can cover your repayment in full, you can arrange a repayment agreement with them that cuts out the interest/fees that were preventing you from making payments on time. You can also ask your employer for an advance on your next paycheck.

In addition, there are some non-profit organizations out there that can help you get back on your feet, including universities, military bases, and credit unions. At these institutions, you can receive free credit counseling. Other organizations, like churches, may also be able to provide financial help.

Note: Payday relief companies are not a good option to break the debt cycle. These scams will only make your situation worse.

You might call the loan company directly to see if you can work something out. Asking for an extended payment plan may help you divide your balance across future pay periods, making the repayment process easier. As long as payments are made on time, you shouldn’t have to worry about additional fees.

Note: There are some states that require lenders to provide extended payment plan options.

If you’re wanting to create a repayment plan that can help get you back on track, you would think you should start with your high-interest debts. The logic here is that you reduce the overall amount you end up paying. This logic makes sense, however, it has proven NOT to be the most efficient and successful for most Americans. A debt snowball technique has helped millions pay off their debts by paying the smallest to largest, regardless of interest rate (take a look at our debt snowball article to learn more).

A final option is to take out a personal installment loan that has better terms than the payday loan. The only tricky part with this is that you have to have a decent credit score to qualify for a personal loan. For those with bad credit scores, a no credit check installment loan may be your only option. With these loans, you’ll at least be allotted a longer repayment period and lower interest rates. If you choose to move forward with an alternative to a payday loan, take a look at what Helix has to offer. with no rollover option, no early repayment fees, and no hassle. We can get you funded and provide you the information and knowledge you need to get you back on track.