One of the most common causes of bankruptcy includes the accumulation of payday loans. Payday loans are extremely easy to obtain, most borrowers are unable to pay the lenders back in full, which creates an unlimited debt trap. One major issue which causes payday loans to become difficult to repay is the extremely high interest rate built into the loan. This never-ending process can put many people in an immeasurable amount of debt.
It is commonly known that all you need to obtain a payday loan is a checking account and a job or source of income. This creates an environment for borrowers to easily take out loans if they are in a difficult financial situation. Many times, debtors are able to obtain multiple payday loans in the same month as it is a highly unregulated industry.
The majority of borrowers are unable to pay their loan back by the due date and tend to take out more than they can afford to pay back. This allows lenders to increase the interest amount and charge the borrower more for not paying their loan back on time, in addition to the inclusion of late fees and penalties. However, if a borrower is unable to pay their loan back in full by the due date, then the lender will extend the loan with a large fee attached. The borrower continues to create a financial hole and a boundless debt trap.
The Consumer Financial Protection Bureau is in the process of passing a proposal that would make it difficult for payday lenders to take advantage of borrowers through outrageous fees. The process will take a long time, but the outcome may be highly beneficial to consumers who are drawn to small-dollar loans.