How Do Payday Loans Work in Ohio? Can Bankruptcy Help?

How Do Payday Loans Work?

If you’ve ever run into a sudden, unexpected expense, you may have considered taking out a payday loan. Payday loans go by a variety of names, such as cash advance, payday advance, or deposit advance, but they all amount to the same thing; a quick and easy way to get that much needed cash in order to survive financially for another day.

However, payday loans can lead to further financial hardships that extend well beyond your initial need for cash. Payday lenders often prey on consumers with usurious rates of interest. In order to understand just what you’re getting yourself into, this article explains the truth about payday advances.

The Payday Loan Process

The typical payday loan is for a relatively small amount of money, but requires you to pay a large interest rate. Say, for example, you need to borrow $100. To secure the $100, you will be required to write a check for $115 that the lender will cash when you have the money in your checking account. You will agree to pay the $115 in a set period of time, usually a week or two.

Example and information provided by the FTC, http://www.consumer.ftc.gov/articles/0097-payday-loans

The scenario above is hypothetical. The typical interest rate for a 2 week payday loan is anywhere between 15% and 30%. The example above is calculated with a 15% interest rate. However, that is the 2-week interest rate. Spread that percentage out over a year, and you get the Annual Percentage Rate (APR). The Federal Trade Commission (FTC) estimates that the APR for a payday loan often approaches 390%. This is not such a good deal. For most bank loans, the APR will not exceed 18%. Hence, payday loans are something that should be avoided when possible.

What Happens If I Do Not Pay Back on Time?

Failing to pay back on time is where most people run into trouble. If you can’t pay back, then you might elect to extend the loan through a “roll over,” which means you must pay another fee. Hence, in the above example, you would probably have to pay an additional $15 to extend the $100 loan for another 2 weeks. Assuming you can get the money to pay back your extended loan, you have now paid $130 in order to get a $100 loan.

Example and information provided by the FTC, http://www.consumer.ftc.gov/articles/0097-payday-loans

Unfortunately, studies have shown that 99% people who take out one payday loan will take out at least one more in the course of a year. This means that the fees keep adding up, and that these borrowers are paying significantly more than they can afford to obtain the cash that they need.

Information provided by eHow, http://www.ehow.com/how-does_4911429_payday-loans-work.html

Thus, you are merely digging yourself a deeper hole. If this trend continues, the lender can take legal action, i.e. the lender can sue you, and take whatever property of yours necessary to satisfy your debt. If you are unable to pay back a payday loan, and the lender has threatened to take legal action, you should speak with an attorney.

Are Payday Loans Safe?

Not always. The FTC has stated that many payday lenders engage in illegal lending and debt collection practices. The FTC reports:

“Some collectors harass and threaten consumers, demand larger payments than the law allows, refuse to verify disputed debts, and disclose debts to consumers’ employers, co-workers, family members, and friends. Debt collection abuses cause harms that financially vulnerable consumers can ill afford. Many consumers pay collectors money they do not owe and fall deeper into debt, while others suffer invasions of their privacy, job loss, and domestic instability.”

Information provided by the FTC, http://www.ftc.gov/opa/reporter/finance/debtcollection.shtml

Thus, if you are being hounded about an outstanding debt by a payday lender that has used any such tactics, you should speak with an attorney to know your rights.

Are Payday Loans from My Bank Safe?

Probably not, but obviously you should see what sort of fees your bank charges first. If you are going to take out a payday loan, it’s worth shopping around for the best deal. However, banks aren’t likely to offer much better deals. In fact, if you take out a loan from your bank, then your bank may be able to take the money you owe directly out of your accounts, leaving you nothing for other expenses.

Payday Loans Should be a Last Resort. If possible, avoid taking out a payday loan, and do whatever you can to avoid taking out more in the future. Do whatever possible to improve your credit rating. This way, you might be able to secure a bank loan at a much more manageable interest rate. Moreover, you should consider taking out a credit advance loan from your credit card company if it offers a better interest rate. Basically, if your short on cash, explore all of your options to be sure you’re not overpaying.

Can Bankruptcy Help?

Not every type of debt is discharged in a bankruptcy filing, can you get rid of your payday loans? Yes. Since payday loans are an unsecured debt, they can be eliminated by filing for Chapter 7 bankruptcy. If you’re seriously indebted to a payday lender andlive in Southern Ohio, give our offices a call. We’ll be happy to review your case free of charge. To schedule a free initial consultation with a Dayton bankruptcy lawyer, please call 937-401-5000, or contact us online.