Payday Loans Can Quickly Harm Borrowers

People who need quick cash and have limited credit options will sometimes turn to payday loans. While this may solve an immediate problem for those in need, in many cases it creates many more problems in the long run. Ironically, these loans are incredibly expensive and can often result in an unmanageable spiral of increasing debt for those who can least afford to pay it back.

To get a payday loan, a person must agree to pay a fee to the payday lender for an advance against his or her next paycheck. The fees generally run about $15 for every $100 borrowed. When the loan comes due on payday, if the borrower cannot repay the loan in full he or she can opt to simply pay another fee and bump the due date out to the next payday.

It's not hard to imagine delaying the repayment of a loan during tough times, but over a relatively short time many people can end up owing far more to the lender in fees than they borrowed in the first place.

The statistics conflict on how well these types of loans can stave off financial crises: a 2007 study by the Federal Reserve Bank of New York study found that households in states where payday loans aren't legal, like New York and Georgia, bounced more checks and filed for Chapter 7 bankruptcy protection at a higher rate than those in states where payday lending is legal.

Other studies have shown people who use payday loans are more likely to file for bankruptcy, delay medical care or default on credit card payments.

Other Options Are Available for Those in Debt

For people who find themselves in a position of being unable to repay their debts, filing for bankruptcy can be a remedy to a seemingly impossible situation by getting rid of debt while keeping property, or simply getting more time to pay off bills. Individuals who are considering bankruptcy generally have two options: filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy.

In Chapter 7 bankruptcy, an individual's unsecured credit card debt is typically all discharged. Most of the time in this type of filing all of the debtor's property is exempt from liquidation and the filer emerges with no future obligation to unsecured creditors. In a Chapter 13 bankruptcy, a court agrees upon a plan for people to catch up on things like a mortgage or car payment within 3 to 5 years instead of a repossession or foreclosure of the asset.