The Truth about Payday Loans

Payday loans are short-term loans to help you get through to the next paycheck, at which time the loan should be paid back. Fees and interest charged for such a service make it a costly way to borrow money. In reality, those who use payday loans are doing worse than living paycheck to paycheck. Avoid this costly type of loan at all costs.

Payday loans offices have been popping up all over the country in record numbers in recent years. They can be seen in every part of every city, but especially in poorer sections and ethnic parts of town. They are preying on people who need help the most.

 

Payday Loans and Chapter 7 Bankruptcy

You will be pleased to know that Chapter 7 bankruptcy allows for a complete discharge of payday loans. The loan must be listed as one of the debts in the bankruptcy filing papers. In addition, no new payday loans should be taken out once you have contacted a bankruptcy attorney. Doing so shows intent to act fraudulently. This will give the bankruptcy judge reason to make you repay the loan. Usually, if you have taken out any payday loans within ninety days prior to declaring bankruptcy, you will have to repay them.

 

Payday Loans and Chapter 13

When you file Chapter 13 bankruptcy, your lawyer will help you create a repayment schedule for a portion of each of your debts. Priority will go to secured debts. Unsecured debts, such as payday loans, may receive some repayment, but it will literally be pennies on the dollar in most cases.

 

USA Today reports that a large number of payday loan borrowers are repeat customers, taking out multiple payday loans a year. In 2004, more than half of borrowers took out six or more loans, and 25 percent took out a dozen or more, making the risk of financial distress among borrowers higher than once assumed. The reality is that any individual taking out a payday loan needs to take a hard look at his or her finances and assess whether more drastic action needs to be taken to avoid a bigger problem.

 

How Payday Loans Work

Essentially, all you need to get a payday loan is a bank account, proof of income, and identification. These loans are typically dispersed from check cashing centers, pawnshops, or possibly the local rent-to-own store, depending on state law. To receive a payday loan, you must provide checking account information or a post-dated check written out for the loan balance plus interest. Once this information is provided, the lender will issue green cash and discuss repayment options.

 

Payday Loans and Their Risks

Typically, those who need and use payday loans are people who are having financial difficulty living within their means. If you already have problems covering the basic expenses of life, then a loan with a high fee and high interest rate will only add to your daily stress. In addition, statistics have proven that those who take out payday loans are more likely to declare bankruptcy than those who do not.

 

Payday Loan Regulation

Payday lending was a hotly contended issue in the 2008 general election in many states. Far too many people find themselves taking out payday loan after payday loan because the high interest rates associated with the loan make it impossible for them to ever really catch up and pay off the loan. In addition, what was once only a way for low-income, bad-credit consumers to access immediate funds with virtually no questions asked has now encroached into the middle-class as previously viable sources of loan funds have dried up and become harder to access.

Consumers are now reporting that they have to take out loans to cover loans, access loans from more than one payday lender at a time, and pay thousands of dollars in interest and fees just trying to catch up. Once the borrower reaches the maximum number of extensions that the loan company can offer (they are regulated by law), the lender will try to take the full amount from the borrower's bank account.

This can cause two potential problems:

• If the lender does this on payday, it may take all of the borrower's money, and the rest of his or her direct debits may not be paid, causing a financial tailspin.
• If the borrower has already paid his or her other debts and the bank declines the payday loan transaction, he or she will incur bank charges and will still be left with the debt that he or she owes the company (plus additional fees and more finance charges), which it will likely put into collection. The collection agency will then add its own fees.

Both of these situations cause people to file a bankruptcy order through the court. The good news is that this type of loan is, in the eyes of the court, no different from any other type of unsecured loan. Despite what you may have been told, it is not treated like a bad check because the loan company knew you did not have the funds in the bank to cover the check when you wrote it.

 

Alternatives to Payday Loans

As mentioned before, payday loans are a quick and easy way to get cash to cover an unexpected repair, medical bill, or living expense. However, those who realize they will be unable to pay the amount due by the issuance of the next paycheck often find it beneficial to pursue other options.

One such option includes taking out a cash advance on a credit card. The interest on a credit card advance is significantly lower than a payday loan (typically between 40 and 60 percent APR), and the borrower does not run the risk of bounced check fees or legal action if the entire balance is not paid off at the end of the month. And while credit cards can cause debt cycles of their own, this may be a better option for those who need extra time for repayment or for those seeking to protect their bank account information.

Using money from a home equity line of credit is another viable option for those needing a more flexible repayment schedule than what is offered in a payday loan. Because home equity payments are calculated over a period of fifteen to thirty years, a person can generally obtain the needed cash while committing to a tiny monthly payment until the debt is finally satisfied.

 

If you recently had a bankruptcy and need a loan, it is not advisable to go through a payday loan company, even though you may find it hard to get a regular loan. If you do, you may end up owing the company (and/or other creditors) a lot of money, with no way out.