Payday loan stores are scattered across the Milwaukee metropolitan area. Offers of a loan without the requirements of a credit check or verified income are easy to succumb to when you are worried about defaulting on your mortgage, having your electricity turned off or putting more groceries on a credit card.

A payday loan is not a long-term solution or even a good way to manage debt temporarily. Payday loans are akin to predatory lending, often creating a much bigger problem than they are ever able to solve. Fees are often 15 or 20 percent of the loan. Borrowers also have the option to extend the loan beyond the traditional two-week term by paying the fee instead of the whole amount.

The Consumer Financial Protection Bureau (CFPB) reports that this is an option approximately 50 percent of borrows choose to exercise. Twenty percent of these individuals repeat this option at least seven times. It can leave many people owing much more than they can afford to pay back. Then, when the debt becomes overwhelming, lenders turn around and take very aggressive collection actions.

The CFPB hopes to change at least some aspects of the industry that make it so dangerous for consumers. The CFPB wants to offer these lenders two options; either they can underwrite the loan or cap the rate.

For short-term loans of less than 45 days, this would mean limiting the number of extensions to just three consecutive loans and reduce the principal balance over time. For long-term loans, lenders would be prohibited from offering a loan with a rate of over 28 percent. These are only proposed changes, and some still question how well they will work.

There is one very real solution to debt, even debt created by payday loans, and that is bankruptcy. To discuss the long-term benefits of bankruptcy, one should talk to an attorney about his or her individual financial situation.

Source: Daily Finance, “What the Crackdown on Payday Loans Will Mean to You,” Nick Clements, March 17, 2015