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Payday loans can lead to financial struggles for borrowers

Payday loans have been in the news a lot recently as consumer advocates have scrutinized the lender’s strict terms and high interest rates.

While the average payday loan is only for about $375 in the United States, the cumulative impact for those who have to rely on them often can be substantial and can cause serious financial problems. How could this be for a loan so small? Well many of them have sky-high interest rates topping 500% per year and penalties for late payment on top of that. This is roughly 35 times the rate that a normal credit card would charge and about 80 times higher than a long term secured loan like a mortgage or a car loan. This results in borrowers paying something close to $800 on a $300 original loan.

Many financial experts have criticized payday loans as somewhat predatory as a result of these rates and the fact that they are utilized mainly by lower income borrowers without access to other types of credit.

While these loans can be a helpful first step when a person is just a little short and needs to make a payment to keep the lights on, many borrowers might not understand the true danger of these types of loans and can end up in hot water when the late fees and interest start to cascade.

When this happens, it can be helpful to consider the bankruptcy process as a way out of mounting debt. Declaring bankruptcy stops collections calls and halts interest and penalties so that a borrower has an opportunity to assess the situation and determine what they can afford to pay.

Source: Business Insider, "6 Outrageous Facts That Show How Payday Lenders Screw Consumers," Hayley Peterson, Oct. 25, 2013 

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