Are Payday Loans a Viable Way to Avoid Bankruptcy?
- grennierlaw
- Oct 16, 2015
- 3 min read
When faced with financial difficulties, many look at the various options they have to get back on their feet. One of the more tempting, and readily available institutions that many consider when dealing with fiduciary troubles is the local Payday loan shop.
A payday loan (also known as a payday advance) is a small, short-term unsecured loan meant to help with financial burdens until the next paycheck. An unsecured loan is a debt that is not protected by a guarantor or collateralized by the borrower if they are unable to repay the loan. Payday loans require the borrower to have previous payroll and employment records, and they usually come with a high interest rate.
Usually, the process consists of the borrower receiving a small cash loan. They are then expected to repay the loan by the time of their next paycheck. To ensure this happens, often a postdate check is given to the lender that can be cashed if the borrower does not show up to repay the debt in time. If the check does not go through, the lender can place additional fees and increased interest rates on the loan. This can greatly exacerbate the original debt problem for the borrower.
Since payday loans are highly risky for people with money troubles, you should probably consider the alternatives that are available before resorting to this measure. Credit union loans have lower interest than payday loans, but can be more difficult to obtain and take longer to process. Other options include pawnbrokers, employee access to earned but unpaid wages, credit payment plans, salary advances, cash advances from credit cards, emergency community assistance plans, loans from family and friends, etc. It has been found that people who take out payday loans often end up having to resort to other options such as these in order to pay off the payday advance.
In the end, payday loans are a dangerous method of acquiring funds, especially if you have other debts piling up. They are very rarely a solution to the problem, and instead make it worse. In fact, they are illegal in many parts of the world, including 23 US states. In California, all payday lenders - whether a storefront or online - must be licensed by the Department of Business Oversight if they are going to do business in the state. Visit the Department’s website to verify a lender’s license. A payday lender may only make you one loan (which cannot exceed $300), and may only charge a maximum fee of 15% of the total amount of the check (up to $45). Additional fee restrictions apply for military servicemembers.
If you are struggling to keep yourself financially afloat and are looking into payday loans, you might want to consider bankruptcy as a better option. If you have already taken payday loans and are struggling to repay them, bankruptcy could help with that problem as well. In Chapter 7bankruptcy, unsecured debts such as payday loans can be discharged, so the borrower no longer has to deal with them. In Chapter 13bankruptcy, the payday loan would be included in the repayment plan.
If you are struggling with debt and trying to decide whether or not payday loans or bankruptcy are right for you, contact Grennier Law, PC and let us help you find a lasting solution to the problem.
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