Think Twice About Payday Loans

Look around you, nearly every corner or street has at least one payday loan company in operation. Many people are drawn to the fast and each cash offered by these companies. So why, if they are so popular and located on every street, are they a bad idea?

The Secured Debt Trap

Most people don’t realize the differences in the types of debt they carry. An unsecured debt, such as a credit card or medical bill, is a debt that is not secured against any asset as collateral. A secured debt, such as mortgage or car loan, is a debt that uses an asset as collateral. Secured debts are difficult to manage if you get behind on payments because the creditor has the right to repossession or liquidate your asset in order to satisfy the owed debt.

In the case of a mortgage or car loan, most people can responsibly manage their payments. If they don’t  the face foreclosure or repossession. Secured payday loans work the same way, only they require an asset that is usually already tied to the original lender as collateral. If you default on repaying a payday loan, your asset is up for the taking by the payday loan company.  Depending on what you used as collateral, you may find it difficult to protect that asset from seizure or never be able to get it back once you lost it to the creditor. If a third party  lender, such as payday loan lender, takes your asset because of default you may end up owing the original creditor who “owns” your asset.

Another problem is that your asset used as collateral in a payday loans may not be protected through bankruptcy. In a traditional bankruptcy, your house, car and most of your personal property may be protected while your debts are resolved. Payday loan debts can often be very difficult to resolve through bankruptcy and you may find your assets unprotected from the payday loan creditor. The payday loan creditor could also come after your paycheck  in a wage garnishment, which may not be resolvable through bankruptcy.