Payday loans are for many a vicious trap. We’ll take a look at how payday loans works and why they cause so much financial problems.
The Payday Loan Process:
- The borrower visits a payday loan store to obtain a small loan that is payable in full, plus fees, on the borrower’s next payday.
- Usually, some form of income verification is required, such as a pay stub or bank statement.
- A credit check may or may not be required.
- On the following payday, the borrower is expected to return to the store to repay the loan in full, including the applicable fees.
- To protect the lender in the event the payment is not made, it used to be that the borrower was required to provide a post-dated cheque for the repayment amount. It is now more common that the borrower provides a void cheque so that the lender can access the borrower’s bank account directly.
Why Payday Loans are Popular & How They Can Lead to Financial Difficulty
For somebody in desperate need of cash with no other alternatives, the appeal of payday loans is obvious. Though the fees are significant, the damage might be minimal if the need is a one-time situation and there is the ability to repay the loan next payday. However, it is a very slippery slope if a payday loan is being used to pay regular household bills or other debts.
If you are unable to repay the loan, many stores will provide you a new loan to cover the initial amount, plus the fees. This cycle, if it continues, simply means that the financial obligation grows with every pay period through a revolving series of loans.
If you do not return on payday to either repay the loan or receive a new loan, the store will attempt to process the payment directly from your bank account. If there are insufficient funds in the account, you will have NSF fees at the bank, in addition to the loan still being outstanding. If you go to the bank to stop payment to the store, they may try to get around the “stop” by slightly changing the payee name or the amount of the payment.
What can I do to break the payday loan cycle?
There is a common misconception that payday loans cannot be included in a personal bankruptcy or consumer proposal. This is absolutely false.
The first step is to close the compromised bank account. If you have no other debts, the basic strategy is to work on saving money to repay the loan in full (without a new loan) in as short a period as possible. This is very difficult to do when you don’t have control over your bank account.
If payday loans are only one loan among many others (like credit card debt, tax debt or other bank loans), you should consider talking to a bankruptcy trustee about how to deal with all your debts and get out of the payday loan cycle.