Payday loans can be tempting for people with unmanageable debt

Pay-day and title loans may appeal to those facing sudden debt who don't have many options, but these loans come with very high interest rates and fees.

The payday and title loan industry makes millions each year in California and across the country. These high-interest loans have been denounced by financial experts because of unfair terms and a fee structure that preys on the desperation of people who don't have the credit rating necessary to secure a conventional loan. This "easy" access to money comes at a price, though; according to the Consumer Financial Protection Bureau (a federal government agency), many of these loans have an annual percentage rate of 400 percent or more.

Finance industry regulators and consumer advocacy watchdogs consider these businesses "usurious," and have fought to get them shut down by filing complaints and lawsuits. Regardless of your opinion of these types of loans, and whether you see them as a blessing or as a curse, the fact remains that these transactions are risky. Several states, including New York, have banned them altogether, while others - like California - have put strict limits on both the amount of money a borrower can request and the amount of interest a lender can charge.

The vicious cycle of debt

When a borrower takes out a payday loan, he or she agrees to pay the money back when the next paycheck arrives (hence the name). The money comes at a steep cost, with interest and fees that can easily equal half of the value of the loan.

Unfortunately, the people who take out the majority of these loans are living paycheck-to-paycheck, so they are unable to pay off the loan in-full during their next pay period. In that case, they either roll the loan over and start accruing new fees and interest or, in states where that practice is prohibited, take out a new loan to cover the added charges. Of course, now the borrower owes even more, and as the loan amount creeps higher, the likelihood that the borrower can afford to pay off the loan quickly sharply decreases.

Because of this vicious cycle, a loan of only a few hundred dollars can result in thousands of dollars in fees and could drag on for years.

The higher education conundrum

Of course, the cycle of payday loan debt is made even worse if the borrower has other significant bills to worry about. Adding a new debt on top of an already unmanageable pile can sometimes prove to be too much, and, far from being a "life-saver," these loans can have disastrous financial consequences.

An example would be someone already struggling with student loan debt. Even people who enter into relatively well-paying careers after college or graduate school can be saddled with student loan debt that they simply cannot afford. Depending on whether the education loans were government-backed or provided by a private lender, they could come with steep interest rates of their own, or have unworkable payback terms that make even the minimum payment impossible. Someone in that situation might consider a payday loan to cover necessary living expenses like rent, utilities and groceries in an attempt to stay current on everything.

A way out

Thankfully, there are ways to legally escape from the burden of unmanageable debt. Filing for Chapter 7 or Chapter 13 bankruptcy protection can stop creditor harassment, forestall imminent judicial action and possibly prevent garnishments, levies or repossession. That being said, there isn't a "one size fits all" bankruptcy solution for everyone; you need an approach tailored to your financial situation. If you are in debt and want to learn more about how bankruptcy might be able to help you, contact a bankruptcy attorney.

Keywords: bankruptcy, student loan, garnishment, creditor harassment, Chapter 7, Chapter 13, debt