Report: Payday loans are taking an increasing toll on borrowers in Texas

It’s not uncommon for Texans to underestimate the financial impacts of payday loans and struggle to pay off associated debts, according to recent reports.

Many people in Sherman have heard that taking out payday loans can be risky, due to the short repayment terms and high interest rates that these loans feature. Still, payday loans remain a frequent source of financing for people facing debt problems in Texas; ABC News reports that in 2013 alone, over 2.5 million payday loans were issued in the state. Sadly, reports show that it's not uncommon for Texas borrowers to struggle to pay back these loans and avoid snowballing debt.

Severe financial burdens

The Star-Telegram explains that people who take out payday loans often end up owing more than they expect to because interest on payday loans is compounded and because the interest rates increase over time. According to the same source, the average initial interest rate on these loans is about 22 percent. This translates to an interest payment of $110 for a $500 loan that is repaid within two weeks, which may seem manageable.

Unfortunately, most payday loans are not repaid within this two-week period. According to ABC News, the average payday loan is not repaid until 11 months after it is issued. By that time, the interest rate and total debt may rise significantly, leading to expenses that are well beyond what the borrower anticipated. If a Texas borrower needs a year to pay back a payday loan, he or she may ultimately face a staggering interest rate of 700 percent.

A vicious debt cycle

Given these short repayment terms and rapidly rising rates, it's not uncommon for payday loan borrowers to be forced to refinance their loans. In 2013, the number of payday loans that were refinanced in Texas exceeded the number of payday loans that were issued. Over 2.9 million loans were extended because borrowers could not pay them back on time.

According to The Star-Telegram, a national study shows that four-fifths of payday loans are renewed for longer than the initial two-week period, leaving borrowers at risk for steep interest rates and rising debt. In parts of Texas, such as Arlington-Fort Worth, more than half of the payday loans issued are ultimately refinanced.

Some borrowers may even resort to taking out secondary loans to pay off their existing ones. The Star-Telegram relates the story of one woman from Richardson, who took out various payday loans so that she could make payments on her previous payday loans. She ultimately accumulated seven loans, with values that ran from $121 to $246. Her total liability for these loans reached $1,229. Sadly, many other Texans may face similar situations and financial strain.

Addressing the problem

State lawmakers have recently been considering measures to address the growing issue of payday loan debt. Last year, a bill sought to limit payday loan amounts, but it failed to pass. This year, one bill aims to regulate payday lending more closely by capping interest rates, limiting unfair debt collection practices and allowing for longer repayment terms. If this measure succeeds, it could become easier for borrowers to escape the debt cycle associated with payday loans.

In the meantime, people facing mounting debt may want to consider other means of addressing financial shortfalls. People who have already taken out payday loans may benefit from exploring debt relief options before their financial obligations escalate further. Meeting with a debt relief attorney may be a helpful first step for people in either position, as an attorney may be able to provide advice on the available debt relief options.

Keywords: bankruptcy, Chapter 7