I’m just old enough to remember the 1977 science fiction movie “Close Encounters of the Third Kind”. In the film, an Indiana man’s life changes after he has an encounter with aliens in an unidentified flying object. When I think about the awful problems that often ensue when people embark on the payday loan “trip”, I’m reminded of the title of that film, and about how very important it is for people to have encounters of the right kind in order to get help with their debt situation.
- More and more middle class families have been so stretched financially that they have been caught in the high-interest payday loan cycle. And that cycle can truly turn vicious. The state of Indiana has rules designed to prevent people from getting into deep trouble through payday borrowing:
- The maximum loan amount is the greater of $550 or 20% of the borrower’s monthly gross income.
- The maximum finance charge for a 14-day loan is 15% (10% if the loan is more than $401).
- Only one loan can be outstanding to a lender at one time, and two loans is the maximum that can be outstanding for any one borrower.
- There are no longer any “rollovers” permitted.
- After three consecutive loans, the lender must offer an extended payment plan, at no additional cost, of at least four equal installments.
Since each payday loan must be paid in a week or two, explains the website PaydayLoan Info.org, consumers may not realize just how costly the loans are. A typical payday loan is $300, most loans are for 14 days, and the average customer has eight to thirteen payday loans in one year. Using those numbers, the total repayment for the year would be $690, or a whopping annual interest rate of 260%!
As I’ve said in earlier blog posts (see “Payday Loans Pave The Way To Bankruptcy”), the next encounter for anyone who gets to the point of using payday loans just to keep everyday bills paid needs to be an encounter of the RIGHT kind – with a bankruptcy attorney. It’s best to get professional advice before things go from bad to worse to 260% interest – to bankruptcy!