A payday loan may not be a good substitute for bankruptcy

It is not unusual, and sometimes it is worthy and commendable, for Tennessee residents to try almost anything to avoid bankruptcy. After all, responsible adults generally want to pay their just debts. Often, people try debt management programs, which can come with its own set of risks but at times can be effective.

When life, however, makes that impossible and the person has lost the ability to pay all bills due each month, sometimes people turn to an instrument known as a payday loan. Unfortunately, these loans often cause borrowers to repeatedly pay the high charges to continually refinance the debt, landing them in a payday debt trap.

What is a payday loan?

A payday loan is not usually for a high amount. Rather, it is small, but the borrower must pay the whole debt off on its due date, which is typically when the borrower gets his or her next paycheck. This is usually in a couple of weeks or a month. The annual rate of interest is often an incredible 300 percent or more. At the loan’s inception, the consumer gives voluntary consent to the lender to withdraw that amount owed, plus its cost or fee, directly from the bank account on the due date.

Regulations to protect consumers from payday loan traps

The payday loan trap has become a detriment to many financially strapped consumers. The United States’ Consumer Financial Protection Bureau has very recently sought to curtail payday debt traps. Among other provisions, it has mandated that payday loan lenders first determine if its proposed borrowers can actually pay back the loan.

The CFPB is also limiting the practice of lenders to repetitively seek to withdraw from the borrowers’ bank account. A lender may try this tactic when a payment did not successfully go through the first time. The practice often causes high bank fees to the borrowers or even causes the bank to close the account.

Generally, it may be that by the time a high-debt person considers the option of taking out a payday loan, he or she may be better off contemplating a more regulated and protective option of bankruptcy for that fresh start needed.