Living paycheck-to-paycheck means constantly monitoring how you spend your money. Sometimes, unexpected bills arrive suddenly, such as when your spouse has a tooth infection. Other times, a short month like February ends with bills coming due before you have the money to pay them. Losing just three days of pay could be the difference between paying rent and falling short.
Payday loans or short-term cash advances seem like a convenient solution to temporary financial issues. However, rather than helping you regain control over your finances, payday loans often make it harder for you to keep paying bills on time. You will wind up trapped by high fees and large payments.
How payday loans or cash advances work
Federal and state laws limit how much interest companies can charge for long-term financing. Short-term payday loans and cash advances allow lenders to charge many times what they legally could on a longer loan.
Companies frequently charge a flat fee for the service, which could be as high as 25% of the amount borrowed, maybe even more. They also assess interest. The money you borrow from your next paycheck requires that you take quite a bit from your next week’s budget, possibly leaving you without enough to pay bills again.
The result is that you borrow more, leading to a vicious cycle with ever-increasing payments. Even borrowing money from a paycheck once will mean paying double-digit interest rates. However, if you keep borrowing against your future income, those short-term loans will cost you. Across the country, borrowers pay roughly 400% interest for these payday loans.
Bankruptcy offers an exit from the payday loan cycle
Once you owe money to a cash advance or payday lender, you will likely find yourself struggling to pay off what you borrowed and regain control over your income. Bankruptcy is a solution for those who cannot pay their bills and have debts they cannot fully cover.
Rather than just adding more interest and fees to what you already owe like another loan would, bankruptcy gives you a discharge if you complete the process successfully. You will no longer have to repay the amount owed to unsecured creditors. You can potentially end your credit card debt and other unsecured debts all at once, freeing up more of your weekly income to cover your basic expenses.
Learning more about how bankruptcy helps you address underlying debt issues can help you escape a payday cash advance trap.