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Payday loans: use at your own risk

On Behalf of | May 12, 2016 | Chapter 13

Many people, particularly those who live “paycheck to paycheck,” can find themselves in a financial bind if an emergency arises like an unforeseen medical bill or a vehicle, auto or home repair. Sometimes, the money to pay for these unexpected expenses simply isn’t available, so, lacking credit to get a traditional bank loan, they’ll turn to unscrupulous sources like payday lenders.

While technically legal in most jurisdictions, payday loans are, in many ways, akin to usury. These loans are dangerously easy to attain, requiring only proof of employment, a bank statement and a post-dated check. There is no credit or background check performed, so basically anyone can get a few hundred or few thousand dollars with just a few minutes’ worth of paperwork. Because there is little effort involved, it can be tempting to see these as “easy money,” but they definitely come at a very high price.

A much higher price than most people realize

Whereas a traditional loan obtained from a bank, credit union or other reputable lender comes with an interest charge (that varies depending on your credit rating, the amount of the loan and other factors), the interest on a payday loan will easily be 10, 20, 30 or more times the rate you would pay at another establishment. For example, a personal loan through a bank to someone with a solid credit score might come with an annual interest rate (APR) of about five percent.

Payday loan interest is usually calculated over the term of the original loan, which is usually from one week to a month and at a rate of between 15 and 30 percent of the loan amount. Once that short-term rate is amortized over the course of a year, the APR balloons to a ridiculously high 500-800 percent.

Snowballing expenses

Some people may think that they don’t have to worry about the APR, because they’ll have the loan paid off as soon as they get their next paycheck. As good as their intentions may be, though, life doesn’t always work out like that. Once the loan comes due, they could have another unexpected expense, or realize that paying off the loan, fees and interest will put them in the proverbial hole again, so they need to extend the loan. This, of course, tacks on additional interest and fees. The next pay period, the same thing happens again. Then again. This snowball effect is how a two-week loan of only a few hundred dollars can grow into thousands of dollars over the course of a year or more.

If you constantly struggle with debt, there may be options available to get you a fresh financial start, including a bankruptcy filing, debt consolidation or credit counseling. To learn more, contact an experienced bankruptcy attorney in your area.