Can I pay an existing payday loan off with another?
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UPDATED: Mar 21, 2012
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In most states, borrowers can pay off an existing payday loan with another payday loan, but such an action is not advised. In fact, the ability and practice of doing just that is why payday loans have such a bad reputation. When one pays off their existing short-term financing by taking out another loan, they commit what is referred to as a “rollover.”
The Payday Loan Rollover
Rollovers are what most consumer advocates feel is the worst part of cash advances. Their feelings aren’t ungrounded either, as the payday loan rollover is the mechanism that allows the existence of debt traps, debt treadmills, or debt holes (all of which are the same thing, just different terminology). Debt traps occur when borrowers finance money, and then must finance more money to pay off the bills of the first loan, only to find themselves stuck in this cycle repeating this financially volatile practice.
Since payday loans are usually used by those already struggling for money, falling into one of these debt traps and consistently rolling over one’s cash advance bills is an unfortunately common occurrence. To make matters worse, many payday lenders station their where there is high demand: in low-income neighborhoods. Because of their high interest rates, short terms, and lack of credit score requirement, borrowers who are not in a position to finance money (or repay financed money) often come into possession of payday loans. Some even find themselves in a worse off position after paying back their financing than they were before they borrowed any money.
All of these reasons contribute to the intense objection many consumer advocates have towards these loans.
So why then do they exist?
As Richard Cordray, director of the Consumer Financial Protection Bureau, explained, “Rightly or wrongly, people faced with tough situations often think these payday loans are their only options.”
Those who are unable to apply for traditional loans from banks and credit unions still face the same financial obstacles as everybody else. When a vehicle breaks down, medical conditions arise, holidays demanding gifts approach, or any other unexpected expense that comes about, these people still need money.
If payday loans didn’t exist then the only way some of these borrowers would be able to obtain quick, short-term cash would be through illegal loan sharks. And their versions of “rollovers” tend to be far less favorable than extra payments.
If you would still like to pay off an existing payday loan with another, you can apply for a rollover here.