Are payday loans and credit card debt becoming overwhelming?

Some Tennessee consumers may enter the New Year with overwhelming debt. Many consumers get swept away by the multitude of exciting product offers over the holidays and overspend despite their good intentions not to do so. This may lead to consumers giving in to the aggressive marketing of payday loans. However, payday loans typically go hand-in-hand with excessive interest rates, and consumers end up with the dilemma of whether to first pay their credit card debt or the payday loans.

Some households get trapped in ongoing cycles of payday loans, and the state of Tennessee has limited the amounts and interest rates on payday loans, along with the number of loans a consumer may have at a time. Consumers may want to check on the interest rates on their respective credit cards and payday loans and start by paying off those with the highest interest rates. However, payday loan agreements typically require full payment within one month.

Some financial advisers advocate consolidating credit card balances onto one credit card with a zero interest rate offer. However, the period for which no interest is charged is commonly limited, and once that period expires, the interest rate may be higher than the cards from where the debt was transferred. So, if the consumer is unable to settle the consolidated amount in full prior to the expiry of the zero percent period, he or she may be worse off than before. In short, once a consumer has to take out a payday loan in order to survive, it may be time to consider further action in order to avoid spiraling deeper into debt.

Tennessee consumers may want to explore the protection offered by personal bankruptcy. Before they start living off their emergency funds or retirement funds, consumers may benefit from retaining the services of an experienced bankruptcy attorney. Such a professional will guide them through a means test to determine whether they qualify for Chapter 7 bankruptcy, which will discharge some unsecured debts, including credit card debt. Those with a regular monthly income may qualify for Chapter 13 bankruptcy, which will allow them an extended payment period as approved by the court. They will continue paying off their debts, but in smaller installments over a period of between three and five years, thereby creating an opportunity to rebuild financial stability.

Source: nerdwallet.com, “Credit Card Debt vs. Payday Loans: Which to Pay Down First“, Anisha Sekar, Dec. 23, 2014

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