Recovering from bankruptcy? Beware the payday loan trap
Consumers may want to rebuild their credit after a bankruptcy, but predatory lenders can target them and make their financial situation worse.
Successfully completing a Chapter 7 or Chapter 13 bankruptcy does not necessarily mean the end of one’s financial struggles. Now it is time to rebuild one’s credit and remain on solid financial ground. However, residents of South Carolina and elsewhere who have gone through a personal bankruptcy may find it difficult to secure lines of credit, which can be important in raising a credit score. During this time, they can be especially vulnerable to predatory lenders, who often target people post-bankruptcy or with low credit by making offers that are tempting and difficult to refuse.
Consumer groups warn that people should be savvy of the signs of a predatory lender. More often than not, payday lending companies fit the description of predatory lending.
How do payday loans work?
To the person in need of immediate cash, especially if he or she has low credit, a payday loan can seem like an easy fix. Payday lenders usually offer small loans of around $500 or less, requiring them to be repaid within two weeks (by the time of the consumer’s next payday). These companies often do not conduct a credit check before lending the money, and they sometimes will not consider the customer’s ability to repay the loan. Therefore, such a loan can seem like the perfect solution to the need for a quick couple hundred dollars.
However, there is almost always a catch to payday loans. The interest rate for a payday loan is exponential, and consumers who are strapped for cash are usually unable to repay the entire loan in such a short period without needing to borrow more so their monthly expenses can be met. Thus, they fall into what is known as the payday loan trap, getting into a debt cycle of taking out another small loan after the previous one was repaid. This is not a rare occurrence – the Consumer Financial Protection Bureau states that four out of every five payday loans are rolled over, or renewed, and more than 60 percent of borrowers end up paying more in fees than the amount of the original loan.
What should people consider before applying for a loan?
Obtaining a loan can be healthy for one’s credit score, but consumers should be wary about disreputable lenders and ask the following questions when considering a loan:
· Can this loan help me rebuild my credit?
· Will the lender pull the full amount of my loan out of my bank account automatically?
· How high is the interest rate and how long do I have to repay the loan?
· Does the company have many complaints against it?
· Does the offer sound too good to be true?
There are reputable borrowing options consumers can consider after a bankruptcy that don’t involve predatory lending. South Carolina residents may wish to speak with an experienced bankruptcy attorney about their debt relief and credit improvement choices.