In some cases, payday loans can also be discharged through a Chapter 13 bankurptcy filing.
If you have payday loan debt, or if you're considering using payday loans to get through tight spots, bankruptcy may be an option for you.
Credit Pitfalls - Payday Loan Stores. Stop the Madness.
When finances are tight, it's easy to fall into one of the many traps set by unscrupulous lenders. Often, it's these short-term "solutions" that push consumers to the breaking point and force bankruptcy filings after months of juggling. Ultimately, most people who find themselves in situations that require these sorts of "quick-fix" credit options are precisely the ones who can least afford them-and who are most likely to be seriously harmed by them.
Whether you're rebuilding your life after a bankruptcy or searching for options that might allow you to avoid a bankruptcy filing, some options may be more harmful than others.
One of the most risky "credit options" available today is the payday advance loan offered by many storefront companies across the United States. These companies offer consumers the opportunity to write a personal check for cash a week or two in advance of payday. The company cashes the check and agrees to hold it until the consumer's next payday, but at enormous cost. Typically, these companies charge anywhere between $10 and $30 per $100 borrowed per pay period.
The terms of these loans can be so damaging to the consumers who use them that some states have outlawed payday loans and the federal government prohibits making payday loans to members of the armed services .
Struggling with Payday Loans? Talk to a Bankruptcy Attorney
How Payday Loans Are Supposed to Work
Here's how a payday loan works in theory:
- The borrower writes a check to the payday loan store for the amount he wishes to borrow plus the fee. For example, for a $300 loan from a store charging $25/$100, the consumer writes a check for $375, postdated to his next payday.
- The payday loan store gives the borrower $300 in cash, and holds the check until the borrower's next payday.
- On the borrower's next payday, he "redeems" the check by paying $375 in cash to the payday loan store.
How Payday Loans Often Work (Not Good for the Borrower)
In the above scenario, the borrower has paid $75 for the use of $300 for a period of somewhere between a week and two weeks.
Of course, many borrowers who take out payday loans fully expect it to be a one-time transaction, or at least something they have to do on rare occasion. However, because people who are forced to take out these high-interest, short-term loans are typically strapped for cash and living from paycheck to paycheck, the process often may work more like this:
- The borrower writes his $375 check and receives $300 in cash.
- On the borrower's next payday, he has other expenses that prevent him from repaying the entire $375 in cash.
- The borrower pays $75 in cash to the loan store and "rolls over" his loan, in essence paying an additional $75 to extend the loan for 1-2 weeks.
- On the borrower's next payday, despite the $75 payment, he still owes the full $375. If he's unable to make the full payment, he can once again pay the $75 in accrued interest/fees and extend payment another 1-2 weeks.
- By the third pay period, the borrower has already paid $150 in fees/interest and still owes the $375. Many states cap the number of times a payday loan may be "rolled over", so the borrower must now pay the $375.
- If the borrower is still unable to pay the $375 in full, the store will most likely deposit his $375 check. If the check is returned, the borrower will have bank fees to pay on top of the $375, and the store will pursue collection in one or more ways:
- Turn the check over to the corporate office for collection action.
- Continue to attempt to deposit
the check. (Note that while standard policy is to deposit checks no more than twice, many payday loan stores will continue to call the bank and/or walk in to the bank to attempt to cash the check repeatedly-sometimes even if there is a payment agreement in effect with the corporate office and payments are current on that agreement.)
- If other collection efforts are unsuccessful, the payday loan store may file a lawsuit against the borrower, adding court costs and attorney fees to the original amount of the check.
- If the borrower is able to pay the full $375 at that point, he redeems the check and the loan is paid in full. However, he's paid, in this example, $225 in fees/interest over a period of 3-6 weeks. For most borrowers who find themselves in need of this kind of short-term loan, adding $225 to their monthly expenses leaves them short somewhere else. Unfortunately, for many borrowers, this means taking out another payday loan within just a few weeks, beginning a cycle wherein the borrower is paying out hundreds of dollars each month just to finance the loans that were supposed to help him out of a short-term cash crunch.
This cycle can be financially destructive, but for a borrower who is trying to rebuild credit after bankruptcy, this cycle can be catastrophic. The loan fees cut into savings and/or the ability to pay down any remaining debts.
The need to make one large payment to the payday loan sto re may delay payment of other bills at a time when it's absolutely critical that all accounts be kept up to date. And finally, use of these short-term loans to bridge between paydays may mask financial issues that should be recognized and attacked head on the moment they appear, before finances begin to spiral out of control.
Experts and Agencies Warn Against Payday Loans
Concern over payday loans and their impact on consumers is widespread among lawmakers and experts. The FDIC is investigating the payday loan industry, and the Federal Trade Commission (FTC) includes a Consumer Alert about payday loans on its website.
Lawmakers in some states have banned payday loans altogether, while others seek to limit interest rates, fees, and the number of times loans can be rolled over. California has discovered and taken action against several payday loan operations illegally doing business in the state.
At the same time, though, online payday loan options are springing up, most often operating out of one of the ten or so states that impose no limitation on interest rates.
In those states, annual interest rates often approach 1000%. That means that a borrower who ended up keeping the loan open for a full year, were that possible in the state in question, would pay $1000 in interest on a $100 loan.
Our original borrower who paid $25/$100 for a $300 loan would end the year having paid back $2250 on that original $300. For a borrower whose finances are already tight-and that's true of nearly every payday loan store borrower-that additional outlay can be fatal to financial stability.
Alternatives to Payday Loans
Credit counselors suggest that even taking cash advances on credit cards-a strategy they virtually universally discourage-is preferable to entering into the payday loan cycle, and generally yields significantly lower interest payments, even when the highest-rate cards are used.
The FTC recommends investigating these options instead of a payday loan:
- Other loan sources, such as:
- Credit unions
- A payroll advance from your employer
- A loan from family or friends
- A cash advance on a credit card
- A small loan company
The FTC also warns that, if you should decide that you have no option except to take a payday loan, you should never borrow more than you are certain you'll be able to pay on your next payday without leaving yourself short for the following weeks.
Category: Payday loans