Over the past number of years, legislatures throughout the country have been creating laws to limit providers of short-term payday loans.
According to a recent article in the Tennessean, the Metro Council of Davidson County approved legislation to further limit the locations and building sizes of these lenders. Backed by a unanimous vote, the bill will prohibit new businesses of this kind from setting up shop within a quarter mile of any other similar business, while also limiting the size of these establishments.
With these legislative measures and the public outcry against payday loans, it is important to ask the question: What is the problem with a payday loan and why should you avoid them?
First, payday loans can be predatory and irresponsible on the part of the lenders. Payday lenders do not perform adequate background checks and they target people who cannot make their monthly bills and need quick cash. Borrowers in this situation are in the worst position to repay this kind of loan in short notice.
Lenders know this, and they target people in this situation, then saddle them with extremely high, compounding interest rates.
A payday loan offers quick money to cover short-term expenses, payable on the next payday. While this seems attractive to many, a major problem arises if the money isn’t there on payday. For those who fail to pay in full on time, the interest rate starts compounding instantly, tacking on interest to the principal of the loan and snowballing to enormous rates quickly.
Even those who do pay on time are often surprised by the fees and expenses hidden in the fine print of these loans.
Rather than helping, payday loans often compound the financial struggles. In far too many cases, payday borrowers find themselves buried under compounding interest rates and exorbitant fees. Unfortunately, these borrowers learn the hard way that a payday loan is usually a short term fix that can cause much more significant long-term problems.
In many cases, a Chapter 7 bankruptcy can be a much more sensible option for finding long-term solutions to serious financial problems.