Consumer Law

Hidden Costs Of Payday Loans Can Lead To Bankruptcy

By M. Stan Herring

The Bankruptcy Law Network has posted an article that discusses the catches that go with payday loans and how it can lead to bankruptcy. Payday loans can be very convenient when you need quick cash because of dealing with things like bankruptcy, but you can borrow a modest amount of money and end up owing several times more than the original amount...all because of exorbitant interest rates.

For example, most payday loans charge about 18% interest per term. The only problem is that a term just lasts two weeks. Multiplying that times 52 weeks in a year and you end up paying 468% APR (annual percentage rate), not including late fees or compounded interest.

Say Fred borrows $300 from Barney at 18%. Assume further that every two weeks Barney adds a $15 late fee after every missed payment. Now assume Fred isn?t able to pay Barney back in time, but he comes into $3000 6 months (26 weeks) after taking out the payday loan. Does Fred have enough to pay his debt?

Here?s how the debt would be calculated:

2 weeks ? $300 x 18% = $354 + $15 (late fee) = $369

1 month ? $369 x 18% = $435.42 + $15 = $450.42

3 months ? $793.65 x 18% = $936.51 + $15 = $951.51

6 months ? $2710.27 x 18% = $3198.12 + $15 = $3213.12

Some people claim that payday lenders actually discourage their customers to pay on time. This can result in a vicious debt cycle that can lead to bankruptcy. We don't cover bankruptcy, however, if you are having financial problems and are considering bankruptcy we do encourage you to seek out more information.

If you have questions or concerns, feel free to contact us through our website or by calling 205-879-2447.

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Full post as published by Alabama Consumer Blog on March 25, 2010 (boomark / email).