The Payday Loan Rollover Trap That Keeps Borrowers Paying Without Escaping
Some people take out payday loans to cover rent or make other payments that only require a few hundred dollars. However, these same loans can turn into financial nightmares with compounding costs.
High fees make it difficult for people to make any progress with the principal while keeping up with other expenses, and it can create a negative feedback loop. Knowing the payday loan rollover trap can help you think twice before taking out one of these financial products.
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How payday rollovers work
Payday loans are small, short-term loans designed to cover emergency expenses while you wait for your next payday. That may sound tempting, but can become a trap, since borrowers can pay another fee to extend the loan’s due date. This fee doesn't help you reduce the principal, and people who keep paying this fee to kick back the due date further can end up in a constant debt cycle.
The Consumer Financial Protection Bureau (CFPB) often warns against payday loans. It lays out an example of a $300 payday loan and incurring $45 in rollover fees every two weeks until the borrower can pay off the principal and incurred fees. That results in $360 in rollover fees after four months, plus the borrower still has to pay off the $300 principal.
The fees trade long-term financial strength for short-term convenience. Borrowers get to delay paying off the principal, but all of the fees end up exceeding the principal without making any progress toward becoming debt-free. This trap can especially hurt low-income borrowers.
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Why borrowers get stuck even when protections exist
Not every payday lender has no-cost extended payment plans, which limit how many fees can accumulate on your loan, and not every borrower knows that those plans exist. This confusion makes it easier for payday lenders to steer unsuspecting borrowers toward their more profitable rollover loans.
State protections for payday loans vary. Some states have banned payday loans entirely, while others have few restrictions.
What borrowers can do before paying another rollover fee
Before paying rollover fees or agreeing to a loan that includes these fees, ask if you qualify for an extended payment plan or a no-cost repayment option. If that doesn’t work, you can contact the CFPB or your state attorney general if you believe your lender has misled you about repayment options. Non-profit credit counselors can offer guidance, and you can also reach out to your bank or credit union to know your rights and determine your next steps.
Local aid organizations and employer hardship programs can provide financial support to help you pay off the balance. While scouting local organizations, you can also review the CFPB’s consumer guidance, which offers some suggestions if you cannot pay off your payday loan.