One of the common mistakes people make when taking out a payday loan is thinking that a “rollover” is the same as a loan extension. With a loan extension, you are simply drawing out the time you have to repay the loan and possibly recalculating the interest accordingly. A payday loan rollover is actually a completely new loan: the total cost of your first payday loan (principle, fees, and interest) are added up and rolled into a new loan. You will have to pay the fees all over again for this new rollover payday loan. Approximately 74% of payday loans are rollover loans.
Let’s take a look at how a rollover payday loan works:
- David takes out a payday loan of $300 to cover a high gas bill until next week’s paycheck comes. The loan has a fee of $75 ($25 for each $100).
- Payday comes and David doesn’t have enough to cover the total costs of the loan ($375).
- David asks the lender for a rollover. The new loan is now for $375 plus a higher fee for the rollover of $120.
- David now must pay $195 to borrow $300. If he cannot pay off the payday loan in full at his next payday, he will end up paying even more.
Before taking out a payday loan, it is incredibly important that you understand how much it is going to cost you at minimum as well as how much it could cost you. Even if you think that you will pay off the loan on time, there are always unforeseen circumstances which may prevent you from doing so.
To avoid getting stuck in rollover debt, it is important that you make a financial plan which ensures that you can pay off the payday debt in full the first time around! You will need to carefully add up all of your necessary expenses and also locate areas where you are spending unnecessarily. Cut out all unnecessary expenses until the payday loan is paid off in full. If you have other debts and bills, it is important to evaluate each of these individually and prioritize which ones need to be paid off first. You don’t get much leeway with short-term loans like payday loans so you’ll have to start budgeting right away. With extremely few exceptions, you should never use a payday loan to pay off other debt.
Payday loans are meant to be short-term solutions for financial difficulties. If your money problem is originating from long-term problems, then a payday loan is just likely to push you into a rut of rollover costs.