Debt "fixes" like payday loans much more of a hindrance than a help

Debt can be a vicious cycle. Bills are paid just to have more creep up. Unexpected expenses like medical bills, auto repairs or property damage can strain budgets to the breaking point. Paychecks are spent to pay expenses before they are even earned. Unemployment, layoffs and slashed hours have put millions of Americans at the mercy of creditors.

Many of those overburdened by debt are tempted by quick influxes of money provided by the countless payday loan businesses around the nation, lured in by a promise of immediate payment. These businesses operate by essentially hedging their bets: they gamble by extending credit without a thorough financial background check. The recipients of this "easy money" do not get away easy, though; these loans come with extremely high interest rates and a very short time to repay them.

How do payday loans work?

Payday loans are meant to be short-term loans to help the recipient "bridge the gap" until his or her next paycheck. The loans are usually given without any formal credit check, and may or may not require collateral. The loan process usually involves the applicant filling out an application to request a certain percentage of his or her paycheck and then writing a post-dated check for the entirety of the loan amount plus interest.

Trouble ahead?

Sounds almost too good to be true, right? Well, that's because it is. The problem with payday loans is two-fold, involving both a short time for repayment and a very high interest rate. These loans are designed to be a stop-gap measure to tide over an applicant financially only until the next weekly, bi-weekly or monthly paycheck comes in, so there is a window of 30 days or less to pay off the debt.

However, the real problem with these loans doesn't necessarily lie in the small window for repayment. The main reason why financial and legal experts adamantly caution people away from payday loans is the exorbitant, usurious interest fees. Many of them come with an annual interest rate of 300 to 500 percent, about 20 times more than most credit cards!

Such a high rate of interest compounds the underlying debt issue by tacking on an additional fee necessary to pay the loan; most people who get these types of loans simply cannot afford the interest payment, so they will ask for an extension. This, of course, leads to a higher amount to pay off in the end.

Steer clear

Attorneys and financial experts have advised clients for years to avoid using payday loan services, and some states have even outlawed them. While they remain legal in many other states, they should be approached with great caution, and other options like borrowing money from a relative, asking an employer for an advance paycheck, negotiating with creditors or filing for bankruptcy protection should all be considered before getting sucked in to the payday loan debt cycle.

If you are having trouble managing your debt, consider speaking with an experienced bankruptcy attorney in your area to see if bankruptcy might be right for you; bankruptcy is a legal tool that can help discharge debt and give you a fresh financial start.