Payday loans hurt your finances and the economy, but you have options

May 15, 2013 (Press-News.org) The effects of the economic downturn over the past few years have left an unprecedented number of Americans struggling to make ends meet. While the economy is slowly recovering, a large number of consumers are still facing the challenges of a burdensome debt load.

Many of these consumers have turned to quick, short-term aid from payday loan companies. When someone is just a bit behind on bills with a paycheck only a few days away, it can be very tempting to call on a payday loan company to bridge the gap. However, payday loans are not only bad for the finances of individual consumers; according to a new report, they are also bad for the economy as a whole.

Household spending better for the economy than spending by payday lenders

While payday loans may be readily available, they only come at exorbitant interest rates. According to the Consumer Financial Protection Bureau, payday loans carry an average annual percentage rate of 392 percent. In comparison, the average APR offered on a new credit card was around 15 percent at the beginning of 2013, according to CreditCards.com.

While payday loans are typically repaid quickly, interest on a loan taken out even for a few days at an APR hovering around 400 percent can take a sizeable bite out of a paycheck. A new report issued by the Insight Center for Community Economic Development shows that payday loans also take a sizeable bite out of the American economy.

The conventional wisdom among supporters of payday loans is that the interest revenue payday loans generate for the loan companies -- around $3.3 billion in 2011 alone -- and the short-term spending power they give to cash strapped borrowers ultimately provide a net benefit for the economy. However, the new report says that this conventional wisdom is dead wrong.

According to the researchers, if the money used to pay off interest on payday loans was instead infused into the economy through regular household spending, far more jobs would be created. The reason is that when money a household would normally spend on things like healthcare, groceries and clothing is redirected to a payday loan company in the form of interest payments, the company tends not to funnel as much of it into the economy as the household would have.

In a sophisticated economic analysis, the report found that every dollar in interest paid to payday loan companies in 2011 resulted in a net loss of 24 cents to the U.S. economy. All told, payday loan interest payments cost the U.S. economy $774 million in 2011. Researchers estimated that at least 14,000 jobs were lost in 2011 as a result of the economic impact of payday loan interest.

Trapped by payday loans? A bankruptcy attorney can help

The new report also linked utilization of payday loan companies to thousands of bankruptcy filings. Indeed, it is easy to get caught in the vicious cycle of dependency created by payday loan companies -- exorbitant interest rates can quickly torpedo a household's finances.

If you find yourself relying on payday loan companies, or even if you are considering taking out a payday loan for the first time, it might be a good time to explore bankruptcy. Rather than taking out more loans to "hang on" as long as you can, you should contact a bankruptcy attorney as soon as you get into financial trouble; the earlier you address debt problems, the more legal options you will have. Talk to an attorney today to learn how bankruptcy could help you.

Article provided by Illini Legal Services
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