I’ve come across a number of people in my practice that get caught up with payday loans and end up with thousands of dollars in debt.
What is a Payday loan?
A payday loan is small, short-term loan that a company will make without a credit check to bridge a borrower’s cash flow gap between paydays. For example, a customer goes into a check cashing store and writes a post-dated personal check for $130 to the store in order to borrow $100 for 2 weeks. The store holds the check until the borrower’s next payday two weeks later. At the end of the two week period, the store deposits the check and makes $30 profit for the 2 week loan of $100. In this case, that would be equivalent to a 720% annual interest rate.
Even more costly is the opportunity to “refinance” given by the check cashing company at time the loan is due. The borrower can either pay the entire amount ($130 in the example above) or the borrower can pay a fee to extend the loan another 2 weeks. So, in this case, the borrower would pay $60 to borrow $100 over a total of 4 weeks.
Some people become very dependent on such loans and they end up taking one loan after another. Many times, they get to the point where what started out as a $100 loan, very quickly turns into a debt of $1,000 or more. Eventually, they can’t pay the money back and their financial world comes crashing down.
The following article I came across illustrates this cycle:
Dishwasher Tangled in a Cycle of Payday Lending
Leon Rountree III
Consumer Bankruptcy Attorney
