Payday loans are tempting, especially if you have reached your stress level over being broke. The lure of quick cash may be too tempting to resist, especially due to its simplicity. You request an amount of money, typically less than $500, and the lender verifies your income. Within a few hours, you have money in your hand.
All you have to do is sign a check or give the lender permission to electronically withdraw the money from your account -- plus fees and interest -- on the day it is due, which is usually two weeks. At the end of the term, if you can't pay, you can return to the lender and request more time. You pay the fees and interest, and the lender will roll the amount over into a new loan with new fees and interest.
Otherwise, the lender will withdraw the money or cash the check on the appointed day. It sounds easy and painless. However, consumer advocates warn that payday lenders only benefit when you can't repay, so they may use predatory methods to cause you to spiral into debt.
Consequences of defaulting
If you pay the loan on time, the lender typically will not report this to the credit bureaus, so your credit score will not benefit from your responsible behavior. However, if you do not repay the loan on time, the payday lender may take actions that will complicate your life in many ways, for example:
- The lender may continue attempting to withdraw the money from your account, resulting in overdraft charges for each failed attempt.
- The lender may attempt to withdraw the money by breaking it into smaller amounts.
- The lender will certainly begin calling you to ask when you are going to pay.
- You will likely receive letters from the lender's attorney.
- The lender may call your personal references and let them know you have defaulted on the loan.
- The lender may ultimately turn your account over to a collection agency, who will report your delinquency to the credit bureaus.
Once the debt collector has your account, which can happen as quickly as 30 days after the loan is due, that agency may file a civil suit, which may result in seizure of your property, wage garnishment and public embarrassment.
A better alternative
The high fees and interest charged by payday lenders are often disastrous for consumers. In Tennessee, payday lenders may charge more than $15 per every $100 you borrow. That's an APR of 391 percent. If you are already struggling financially, you may be taking a great risk turning to a payday loan for relief.
A safer alternative is to seek professional advice. Speaking with an attorney about options for debt relief will provide you with answers and alternatives that will not place you at risk for continued decline into financial trouble. An attorney will dispel any misconceptions you may have about bankruptcy and help you determine if it will work for your circumstances.