Bankruptcy

Payday Loans: How to Borrow $300 and Owe $3000

By Russell A. DeMott, Charleston Bankruptcy Lawyer

If you?re filing bankruptcy, then chances are you may may have taken out a payday loan recently, according to a ?Do Payday Loans Cause Bankruptcy?? by Paige Marta Skiba of Vanderbilt Law School and Jeremy Tobacman from the University of Pennsylvania.

In theory, I have no problem with the concept of payday loans.  It’s nice to know that if you need some fast cash there’s a way to get it.  And  with the credit crunch, payday loans are a place people can still turn to in an emergency.  But note that I said “in theory.”  The reality of payday loans another story–and a sad one at that.

The Cost of Payday Loans is Astronomical

Many payday loans are about 18% for the term.  That doesn?t sound too bad, but consider this: the term is usually two weeks!  Since there are 52 weeks in a year, a simple estimate of the annual percentage ate (“APR”) would be at least 26 x 18%–or 468% (not including any late fees or any compounding of 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

If Barney were a loan shark, Fred would have two broken legs right now. Ouch!

I know math is a harsh mistress, but I think I would give up my law practice and move to Maui if I could realize more than a 1000% return on my investments!

The authors of ?Do Payday Loans Cause Bankruptcy?? claim that many payday lenders actually discourage their customers to pay on time.  The effect is a cycle of debt that is hard to escape leaving many with no alternative but to file bankruptcy.

It’s easy for those of us who don’t need to resort to payday loans to say “don’t do it.”  But the reality is that in this economy may folks find themselves between a rock and a hard place.  It’s a matter of getting the payday loan or eviction, or perhaps getting a payday loan or losing a car.

That Payday Loan is Like a Drug

But payday loans are financial heroin.  They result in the borrower being caught in a never-ending cycle of debt.  And having to borrow from a payday lender is a sure sign of financial problems.  If you’re caught in this trap, seek advice from a bankruptcy lawyer in your area who will evaluate your entire financial situation.

Bankruptcy may be the right choice for your situation if you’re caught in the payday loan trap.  After all, bankruptcy is about giving the “honest but unfortunate” debtor a fresh start.

Russell A. DeMott is a Charleston, South Carolina Bankruptcy Lawyer.

Full post as published by Bankruptcy Law Network on March 08, 2010 (boomark / email).