How to escape the payday loan trap

This guest post comes from Andrea at So Over Debt.

Ah, payday loans. The bane of my existence for more years than I care to count.

Payday loans can seem like a great idea when you’re desperate for money -- they have offices on every corner, it's relatively easy to be approved, and the staff don't ask a bunch of nosy questions. You can walk out with an envelope of cash in 15 minutes if you come prepared. What's not to love?

How payday loans work

Let's say your car dies and you need $400 to get it fixed. You need it fixed NOW; otherwise you won’t be able to get to work and you could lose your job. You don't have $400 and neither does anyone in your family. Your credit cards are maxed out (or you don’t have any credit cards). You can't get a loan from a bank. What do you do?

A lot of people opt for a payday loan. You walk in with a bank statement and a pay stub. You tell them you need $400. You sign a few papers. You write a post-dated check for a month from now for a little more than the amount you borrowed ($405 at a lot of places if you’re a new customer). You walk out with your money and pay for your car repairs. On the due date, you bring in $405 cash and your post-dated check is returned to you.

Easy, right? Except the story doesn't end there.

Because that $405 is probably going to prevent you from paying your bills. So what do you do? You immediately take out a second payday loan. This time you only have two weeks to pay it back, and you owe $445 instead of $405. It's only $40, you think to yourself. I'll just cut back on eating out and it won't be a problem. Two more weeks pass and you're repeating the cycle.

In the meantime, you get really sick. You don't have insurance, and the medication you need costs $300. So you go to a different payday loan place and borrow the money to pay for your medicine. You are now running between two offices every payday, handing over all (or more) of your paycheck, then signing your name to get the money back (minus $100 or so between the two loans) to pay your bills.

How do you get out of this hole you've dug for yourself? A lot of people don't.

I know because I've been there

When I was still married, my husband and I took out a payday loan for a car repair. We knew I'd be getting my extra student loan money soon, so we were confident we wouldn't get caught in the endless cycle. And we didn't -- we borrowed the money, then paid it back a week or so later when I got my financial aid check.

But my "dear" spouse, in all his infinite wisdom, really enjoyed the ease of borrowing cold hard cash from the payday loan place. Less than a month after we paid off our initial loan, he took out another without telling me. And used the money to sign up for jiu jitsu classes.

It took probably six weeks for me to notice the chunks of money missing from our bank account. After all, we weren't exactly great at keeping up with our finances. I usually didn't look at our bank account because I didn't want to know how bad things were! When I found out what was going on, I nearly hit the roof. With no extra money coming anytime soon, I knew there was no way we could pay off the loan. So we just kept paying and borrowing, paying and borrowing, paying and borrowing.

Then Christmas came. With 19 kids between both of our families (including our own kiddo), it never occurred to us to say we couldn't afford to buy Christmas presents for everyone. This time I was the one taking out a payday loan. I had to go to a different place. When the lady asked if I had any other payday loans, I looked her in the eye and said "Nope!" (My husband did, but she didn't ask about that, so I told myself it wasn't a lie.)

We were losing over $100 every two weeks just for the privilege of making ends meet. It made me sick. Actually, it still makes me sick thinking about the money we lost. We could have had a heck of an emergency fund. But there was/is no point beating myself up over something that already happened -- I just needed a way to fix it. Post continues below.

How to get out once you're in

There are basically two ways to get out of the cycle of payday loans. The first involves a lump sum of money -- a tax return, a gift from family or friends, overtime at work, or money from selling something of value -- that you use to pay off your loan and move on with your life. Since this doesn't usually happen, most people (myself included) go with option two.

Using the earlier example of borrowing $400 and paying back $445, let's assume you're tired of this crap and want to pay off the loan for good. Here's what you do.

The next time you go to pay off your loan and borrow more money, borrow $380 instead of $400. You may have to make some adjustments to make it through the pay period, but I promise you can do it. After all, before you got into this mess, you probably thought you couldn't live without that $45 a payday you’re giving up right now.

So you're borrowing $380 and you'll have to pay back about $432 instead of $445. Hooray for progress! The next time, borrow $360 instead. You'll pay back maybe $419. Notice how you're getting $20 less each time but your payments aren’t even decreasing by $15 -- that's another way they keep you stuck.

Obviously if you keep dropping by $20 increments, it will take you about 100 years to pay off the loan entirely. It's a good start, but it's not enough. Time to get creative. What can you sell to make extra money? Do you have any skills that someone would pay for, like cleaning houses or mowing lawns? Any extra money you make should be saved for the next pay period -- and that's how much you decrease your loan. If you're at $360 and you make $100 on the side, borrow $260 next time. Doing this takes A LOT of discipline. It sucks. But it's better than being stuck forever.

How to prevent future payday loans

OK, so you've hustled your butt off, your payday loan is history, and you're breathing a little easier. But what if disaster strikes again? (You know it always does as soon as you think things are OK.)

Remember that $45 you were paying to the payday loan place every two weeks? Obviously you survived without that money somehow. So you're going to keep surviving without it, as long as it doesn't prevent you from eating. Open a savings account or get a shoebox, whatever works best. Every payday, put the money in that safe place and forget about it. It's not there for you to pull from when you're broke and you want to go to the movies. Pretend it's gone, just like it was before. If you can leave the money alone, in a few months you'll be prepared for a small emergency. In a year, you'll have more than $1000.

It's not easy

Saving money is never easy, especially when you're broke. But I promise, if you can quit throwing away money on payday loans, you CAN make other changes in your financial life. You could create a budget. You could think about the two ways to get out of debt and what changes make sense for your situation.

Payday loan companies are evil. They prey on people in bad situations and make things even worse. They charge obscene interest rates to keep people trapped for years and years. If you don't want to be in this position, you have to make a new plan for emergencies; one that DOESN'T include throwing money away.

For a jaw-dropping read about the payday loan industry, check out "Broke, USA: From Pawnshops to Poverty, Inc. -- How the Working Poor Became Big Business" by Gary Rivlin. I learned a LOT from this book. And it made me even more determined to NEVER go down that road again.

Have you ever been trapped in the cycle of payday loans? How did you escape? Are you trying to get out right now? Let me know what you think!

More on So Over Debt and MSN Money:

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• Credit unions offer payday loans
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• Confession: I'm not frugal