Beware of short-term debt solutions
Short-term debt solutions can result in long-term headaches.
Many Americans live “paycheck to paycheck,” with very little – or no – money left over at the end of the month after the bills are paid. A single sudden, unexpected expense like a car repair, broken appliance or medical emergency can be enough to send someone scrambling to make ends meet. People in desperate financial straits are often tempted by options like payday loans and auto title loans to get back on their feet.
Sadly, these types of short-term “solutions” more often than not cause long-term headaches and financial strife. These services, attractive to low-income borrowers because they don’t usually come with credit checks and offer smaller amounts of money than traditional bank loans, are rife with hazards and can easily trap borrowers in a cycle of debt.
The most common type of predatory short-term loan is a “payday loan.” These are meant to bridge the gap between pay periods for people who need a relatively small amount of money (the average is between $300 and $500) quickly. The borrower provides proof of income, deposits a post-dated check with the lending company and is usually given the money in about 30 minutes. The lender agrees to hold the check until the borrower’s next paycheck is deposited. It sounds good in theory, but these loans can be very hazardous to your financial health.
The problem with payday loans is their exorbitant interest rates. Many of these come with an origination fee and usurious interest rates that would, if amortized, easily top 250 or 300 percent annually. On a two-week loan of $300, the average borrower will end up owing at least $375. Most cash-strapped borrowers can’t afford that sudden added expense, so they end up rolling the loan over into a new one, with additional interest and fees tacked on. If they can’t afford the full payment at the end of the new term, the cycle continues.
The Florida legislature has tried to quell the practice of rolling over payday loans by limiting the number of loans that any borrower can have at a time, but the rules only apply to “brick and mortar” companies. There are countless online options that aren’t bound by state law. Borrowers can become trapped in a debt cycle that goes on for years, costing them up to 10 times the original amount borrowed.
Auto title loans
Another short-term debt “solution” marketed to the financially desperate is the auto title loan. These loans use your car’s title as collateral to offer you a short-term loan that is a percentage of the car’s value. Like payday loans, these usually come with high interest rates and fees. In addition, if you don’t pay the loan as stated, you risk losing your car, having to pay additional fees for repossession and storage of the vehicle, and losing out on any amounts that the company makes for the sale above and beyond what it costs to pay back your loan.
At the Orlando law offices of Lewis & Monroe, PLLC, we understand what it’s like to be in dire financial straits. We’ve been helping people find debt relief through bankruptcy for over 30 years. We understand the desperation that might tempt you to seek out a high-risk, short-term debt solution, but there could be a better path to financial freedom for you. To learn if bankruptcy is right for you, and if it could put you on the way to fresh financial start, call us at 407-917-4147 or contact us online to schedule a free initial consultation.