Dear Debt Adviser,
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I had a medical emergency last year and opened a payday loan for $1,500. I haven't been able to pay it off, and I'm unable to get a real loan due to a decline in my credit score. Is there any way out for me other than bankruptcy? A loan with a co-signer maybe? I hate being behind on my bills, and I want to resolve this.
Bankruptcy isn't the best option here given the relatively small amount you owe. It's usually a last resort, and it'll sink your credit score. Also, once you file for bankruptcy, there's a lengthy waiting period before you can file again (should you need to).
You have other options, but they will require some planning on your part.
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First, you should drastically cut back on expenses to pay off the payday loans. Take a look at your monthly spending and determine how much you could save on a bare-bones budget. By bare-bones I mean no entertainment, no cable TV, no new clothing, no lattes and not even any bubble gum -- at least for a while.
I also want you to look for a part-time job or some overtime to bring in more money. If that's not possible, then consider selling something.
And you might try to pay off some of the loans with a credit card. Using credit got you into this mess. Using more of it to get out is less than ideal. And you may not qualify for a card with a low interest rate at this point. Still, a high-interest-rate card that takes you months to pay off would still cost less than the fees you are paying to the payday lenders.
If you're unable to qualify for a credit card on your own, and you know someone willing to help you out, you could request that he or she co-sign for a credit card account. Before going through with this, make sure that you have a solid plan for paying off the balance on the card. Share your plan with your potential co-signer and promise that you will let the person know in advance if you are ever unable to make the required monthly payment. If someone is willing to put her own credit on the line for you, you need to make good on your promise to pay. At the very least, you should let the co-signer know if you're going to fall behind on your payments.
Once you have broken the payday loan cycle, begin saving for emergencies so you can avoid being in this situation again in the future. Save as much as you can each pay period and include any unexpected funds such as pay raises, tax refunds, etc. until you reach at least six months' of living expenses.
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