Everyone has been in this situation: you need money fast, maybe for a car repair, medical bill, or simply to buy groceries. Unfortunately, your bank account is at zero and its still a week until payday. You pass a payday loan store every day on your way to work, so you stop in to check it out. Of course you leave the store with the money you need to hold you over until your next paycheck.
What happens when you get that next paycheck? Other creditors have a claim for most of that paycheck already. Maybe you have automatic withdrawals from your bank account for a mortgage payment, child support or phone bill. Also, your electric bill is due. The utility company will cut off your power if you don’t pay, so you don’t have the money to pay the payday loan when it is due. The nice lady at the payday loan store says “no problem”, you can just roll it over to the next paycheck. Surely you will have the money by then.
The snowball keeps getting bigger
While that initial payday loan may have seemed like the perfect solution at the time, it will inevitably grow into a bigger debt. Payday loan lenders offer smaller amounts of money that traditional loans for shorter periods of time – usually weeks. They may not do a credit check or even verify your income. Other drawbacks to payday loans include the following:
- The entire loan amount is due at the end of the term.
- Interest rates can be 300 percent APR and higher.
- You will probably have to re-borrow the loan, adding more fees and interest to your debt.
- The lender may require access to your checking account to debit the loan payment.
If you allow the lender to have access to your checking account, they may make repeated attempts to access the money if they are unsuccessful because you do not have enough in your account. A new rule by the Consumer Financial Protection Bureau (CFPB) limits the lender to two attempts to debit the loan payment. After that, you must grant authorization for further tires to withdraw your money. However, each failed attempt to withdraw money means banks overdraft fees for you and may even result in the bank closing your account.
The CFPB has recently passed other new rules designed to protect people who use payday lenders. However, financial advisors warn consumers that payday lenders are rarely the solution to their debt problems and often make them harder to overcome. If you are struggling with debt that makes it difficult for you to make it to the next paycheck, you may need professional assistance such as a qualified bankruptcy attorney to examine your options for debt relief.