Payday loans perpetuate the debt cycle

March 16, 2013

Short-term financial solutions like so-called "payday" loans may seem like a good fit for someone facing an unexpected expense. They usually require no collateral and no credit check, and the money is most often in-hand before the ink is dried on the loan agreement. These loans have a short lifespan, designed to be a bridge between now and the borrower's next paycheck.

So, all you have to do is apply, get your money and then pay it back when you get paid - easy, right?

Not so fast...

Unfortunately, there is a lot more than meets the eye where payday loans are concerned. Desperate people facing having their utilities disconnected or their vehicle repossessed see payday loans as a salvation of sorts, but that definitely isn't the case. The people who most often are attracted to these loans are caught in a catch-22 situation: a traditional bank isn't likely to lend them the money because they may have a relatively small income or a not-so-stellar credit rating, so they turn to payday loans that have more than their fair share of negative consequences.

A key differentiating factor between payday loans and traditional loans (or credit cards) is the interest rate. Payday loans have extremely - most would say "usurious" - interest rates, reaching as high as 500 percent APR. That is about 25 times as much as the average credit card!

Once the date arrives for the loan to be paid back, many borrowers realize that they can't afford to pay it off. Many borrowers choose to defer the loan at that point, assuming that they will be able to pay it shortly in the future, maybe with their next paycheck. That just means that the loan's exorbitant interest rate will be applied to an even larger sum. In only a few weeks, the borrower's initial loan amount could be significantly higher, perpetuating a cycle of debt that can last not for weeks, but for years.

Other, better options are out there

There are several financial options better than a payday loan, options that will keep you from saddling yourself with a massive amount of interest and a debt that seemingly never stops growing. These include:
- Asking for an advance on your paycheck
- Seeking help from a friend or relative
- Using a credit card to pay an unexpected expense
- Trying for a loan at a small bank or credit union, which often have lower credit standards than bigger facilities
- Negotiating the sudden or unexpected expense directly with the creditor
- Seeking Chapter 7 or Chapter 13 bankruptcy protection

Are you facing a mountain of debt? Wish you had help to make the creditor calls and nasty letters stop? Do you want a fresh financial start? If you answered yes to any of these questions, consider speaking to an experienced bankruptcy attorney in your area: it may very well be that filing for bankruptcy is the best option to get you back on the path to financial freedom.

Article provided by Davis Law Firm
Visit us at www.jeffdavislawfirm.com