Don’t be tempted by payday loans and other short-term debt "fixes"

Ohioans seeking financial help from short-term, high-interest loans could find themselves mired in debt.

Surveys show that about a quarter of Americans live "paycheck to paycheck." Generally, these people are able to make their utility and house payments, but have very little left over at the end of the month. This often means that they have no savings account and no "emergency fund" in case something goes wrong. They could end up struggling each month just to make the minimum payments on debt and cover basic expenses.

With a budget that tight, a single financial surprise - such as a car repair, broken appliance or medical emergency - can seem insurmountable. If you're dealing with an economic crisis like this, you might be tempted to visit one of the Ohio's short-term lenders for a loan.

Before you sign on the dotted line with a payday lender, however, you should understand exactly how these predatory loans work and the potential risks associated with them.

How do payday loans work?

A payday loan is a relatively small loan (the average, according to a 2012 Pew Research survey is $375) offered without a credit check on a very short-term basis. The borrower provides proof of income/employment and basic vital information, along with a post-dated check, and leaves with money in hand.

In exchange for not running a credit check, the lender provides funds at a high interest rate. Whereas a typical bank loan to someone with good credit could be between five and eight percent annual interest, many payday loans have amortized annual percentage rates hundreds of times higher than that.

The high-interest debt cycle

The interest rates may not seem that shocking initially, because the life of these loans is intended to be short. They are designed to bridge the borrower until his or her next paycheck. Even so, it is common for someone who borrows only a few hundred dollars to end up paying more than a quarter of the loan's total value in interest and fees.

People in Ohio pay the highest rates in the nation, with interest reaching an astounding 591 percent for some borrowers. This is 21 times more than the maximum amount of interest established by the state's Short Term Loan Act back in 2008. Lenders have found loopholes in that law, such as classifying themselves as "Credit Service Organizations" or by lending money not under the Short Term Loan Act, but instead under the Ohio Mortgage Lending Act or the Small Loan Act. This allows them to not only lend out more money than the $500 statutory cap, but to also charge usurious interest rates and extend loan terms for months or even years.

Have you considered bankruptcy?

If you are struggling to make even the minimum payments on your debt each month, a payday loan like this isn't likely going to help your situation. It will, in fact, probably make things much worse for you. You'll end up that much farther in debt that you would otherwise, you'll be subjecting yourself to even more harassment, and you just might have to file for bankruptcy protection anyway.

Bankruptcy exists for a reason: Congress understands that sometimes you are mired in debt with no other way out. Bankruptcy is there to discharge debt and give you the opportunity to get a fresh financial start. Instead of continuing to swim against the rising tide of your debt, why not get help?

To learn if bankruptcy is appropriate for your unique financial situation, contact an experienced bankruptcy attorney at the Cleveland, Akron or Canton area law offices of Debra Booher & Associates Co., LPA.