Everyone has had the experience of being in a financial pinch—not enough money to pay your bills or offset some emergency, and your paycheck is a week or two away. You may have money saved in an emergency fund to help you through a tough situation, but what if you don’t have any cash and no one to loan you the money? This is when some people get into the payday loan trap: a dangerous loan with high interest rates that can often lead to bankruptcy.
What is a Payday Loan?
A payday loan is a short-term, high-interest loan that’s based on the amount of your paycheck. These loans don’t require a full credit check and can deliver cash immediately. However, they also have sky-high interest rates that can range from 300% to 900%. The borrower writes a check that includes the amount of the loan, the interest, and any fees charged by the lenders. When the borrower’s payday arrives the lender will cash the check.
An Endless Game of Catch-Up
It’s bad enough that payday loans are high interest, but often times they’re also not as short-term as one would hope. Many borrowers are unable to pay off their payday loan so they ask the lender to “roll it over” to their next pay period. This can lead to a vicious cycle until the borrower is paying so much interest that the interest costs are far more than the original loan.
It’s Impossible to Pay
Eventually the borrower’s payday loan grows so large that it’s impossible to repay it. They may even have several payday loans weighing them down. The only way to get any relief from these abusive loans is to file bankruptcy where they can be completely discharged in the case of Chapter 7 or at least paid off if you file Chapter 13 bankruptcy.
“Eventually the borrower’s payday loan grows so large that it’s impossible to repay it.”
If you’re burdened with payday loans, talk to a qualified bankruptcy attorney or debt relief counselor about your options.