Payday lending: a potential financial rabbit-hole

Payday lending can exacerbate your financial woes, leading to bankruptcy.

If you're struggling to make ends meet, you may be budgeted down to the penny just to cover essentials like food, mortgage/rent payments, utilities, credit cards, debt payments and other expenses. You live paycheck to paycheck, and most of the time it seems like your money has been spent before you even earn it. If you are in a precarious financial situation like this one, a single deviation from the norm could dramatically upset the delicate balance you've created. You could be a single medical emergency, auto repair, appliance breakdown or home repair (like needing a new water heater or furnace) away from financial ruin.

Should one of these situations arise, you may find yourself short on funds and desperate for help. You may be thinking seriously about taking out a short-term "payday" or title loan to bridge the financial gap. Such loans are now available virtually 24/7, with both brick-and-mortar locations and online lending easily accessible. You assume you can just borrow a few hundred dollars to tide you over and then repay it with your next paycheck. What's the worst that could happen, right?

The real cost of payday loans

Payday loans are typically used by lower-income people who have bad credit or no credit, no savings and few other options. Payday lending businesses will give loans to people that traditional financial institutions would consider "high-risk." Their willingness to extend the money isn't done out of generosity, though. Recipients pay a very high price for these funds in the form of exorbitant interest rates and hefty fees.

Because of the high cost associated with obtaining funds from a payday lender, many financial experts consider these types of loans predatory in nature. Interest rates can easily be 40-50 times as high as a standard credit card, and some states - Mississippi isn't one of them - have declared such loans illegal for that reason. There could be origination fees not only when the borrower takes out the loan, but also each time a loan is "rolled over" for a new term because it couldn't be fully repaid. This means that an initial loan amount of just a few hundred dollars with a term of less than a month to repay could easily snowball into years of payments totaling thousands, trapping the borrower in a cycle of debt that he or she can't escape. It is important to note that, technically, the practice of "rolling over" a loan like this is illegal in Mississippi, but that doesn't stop some unscrupulous business owners from engaging in the practice anyway.

When bankruptcy is actually the answer

If you find yourself dealing with unmanageable debt and worry, stress, mounting balances due to missed payment fees and interest as well as creditor harassment, you may have considered seeking bankruptcy protection. Like the decision to seek a payday loan, bankruptcy isn't one that should be taken lightly. That being said, bankruptcy may just be the best option for you. Depending on your particular financial situation, it may be possible for a bankruptcy filing to discharge all or a majority of your unsecured debt, giving you a fresh financial start. Bankruptcy also comes with the added bonus of, as soon as you file, making creditor harassment stop.

To learn more about how Chapter 7 or Chapter 13 bankruptcy could help you, speak with experienced bankruptcy attorney Michael G. Pond today. You can call the Jackson, Mississippi-based Pond Law Firm at 601-948-4878 or contact the firm online.