Many Americans live paycheck to paycheck, so when an emergency happens, like an expected medical expense or a car repair, they don’t have any extra cash to cover it. They may turn to a payday loan for help.
Unfortunately, payday loans are commonly known as debt traps because they can easily cause a person’s financial situation to go from bad to worse.
How payday loans work
Payday loans get their name because they provide people with fast cash before their paycheck arrives.
The person tells the loan company how much cash they want and then pay a fee to borrow that amount. The loan is secured by a check or bank account debit authorization. The person has to provide a little bit of personal and financial information, but credit history is not checked, which is why it is such a quick process.
However, the loans have extremely high fees and interest rates. For example, the annual loan interest rate for a payday loan in Louisiana is 780 percent, according to the Greater Baton Rouge Business Report. The annual percentage rate for major credit cards is 24 percent.
Many states have caps on annual loan interest rates, but Louisiana does not.
People get trapped in a cycle of debt
The only way that payday loans can work effectively is if the borrower repays the loan as soon as possible. When the borrower is unable to repay the debt at the end of the loan term, additional fees keep being added and the debt continues to grow.
In some cases, the debt spirals out of control and the borrower is sued and harassed by the loan company. With an order from the court, the loan company can begin garnishing the borrower’s wages.
How to get out of debt caused by payday loans
Bankruptcy is often the only way out of the debt trap caused by payday loans. While bankruptcy should always be a last-resort option, it is often the only option for people in this situation. It can be effective at putting a stop to creditor harassment, lawsuits and wage garnishment.
Keep reading for more information on getting out of debt caused by payday loans.
Attorney Advertising Disclaimer: Under Federal Law, we have been designated a Debt Relief Agency and we help people file for bankruptcy relief under the Bankruptcy Code. This information is not intended as legal advice and no attorney-client relationship is created. Results may vary. Results not guaranteed.
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