Payday loans are a way for those who know that they have money coming but who have bills now. They can certainly help some people who need the cash on hand, but the money comes with some very serious risk — which has landed even money conscious people in financial trouble.
The way that payday loans work is that a consumer goes to the payday lender. Let’s pretend that the consumer needs $500. They would write a check to the payday lender for $500 plus whatever fee the lender charges for the transaction. The consumer post-dates the check for an agreed upon day in the future. The consumer then gets $500 cash and has the option of either paying the loan back early or the lender will cash the check the consumer wrote should the consumer fail to pay off the loan at the expiration of the agreed upon date.
This sounds all well and good. The consumer simply has to wait for their next paycheck and they will have the money to pay back the loan. But what if they don’t? What if a new expense comes up before the payment is due and there are insufficient funds in the consumer’s checking account. The check was post-dated, but as soon as that day comes, the payday lender will cash it. If there are insufficient funds, there are huge penalties for the consumer.
In terms of the penalties, there isn’t just one fee. The penalties compound the longer time goes on. A $100 payday advance can quickly turn into a $1,000 or more debt.
Bankruptcy attorneys and consumer creditors see this situation often. In many cases, it involves those in the lower income bracket. The director of one nonprofit credit counseling service said that these types of businesses seem “set up to prey on people who are the most vulnerable.” While it might do that, data shows that a large number of middle class individuals use the service as well as a way to come up with small loans even when their credit is bad.
Source: News-Record, “Payday or mayday for borrowers?” Taft Wireback, March 3, 2013
Our Tampa law firm helps individuals in situations such as this one file for Chapter 13 bankruptcy protection to help reorganize their debt.