It’s hard to drive down a city street or log on to the Internet without seeing an ad for payday loans. The way payday loans work is that a borrower writes a personal check (or sometimes signs over electronic access to a bank account) for the amount borrowed plus the finance charge. The borrower gets cash now, but the lender waits until the borrower’s payday to cash the check or access the account. Our state of Indiana is one of thirty seven U.S. states in which payday loans are legal.

As an Indiana lawyer for bankruptcy, I often meet with people who have tried every form of loan there is, including payday loans. Without any question, the payday loans have come at the greatest cost to the borrowers. Just to give you an idea, a $300 cash advance on a credit card paid back after one month might have an annualized interest rate of 57%. But, awful as that is, the payday loan is much, much worse. That same $300 on a 14-day payday loan renewed once for another 14 days would carry an approximate rate of 260% annualized interest! And that doesn’t count any late payment or non-sufficient funds penalties.

Of the states that do allow payday loans, Indiana is one of the more “restricted” states in terms of its rules about payday lending. Payday lending is regulated by the Indiana Department of Financial Institutions. A few of Indiana’s rules are that the maximum loan amount is $550 (or less, because the amount can’t exceed 20% of the borrower’s monthly gross income), that the maximum finance rates are 10-15% (varies by the size of the loan), and, most important, no rollovers permitted (you can’t renew or refinance).

Besides the punishing high cost, one aspect of payday lending I see that gets many people in trouble is accepting offers through the Internet. Consumers applying for payday loans online or via fax need to worry about security and fraud risks in addition to the financial risk. But even if the lender operates totally within the law, and no one hacks the information, payday loans are a terrible danger to people’s financial health. Let’s face it – anyone who’s reached the stage of not being able to pay the next two weeks’ living expenses without borrowing money needs to get off the merry-go-round now, halt the downslide, turn off the pressure from creditors, and get to a professional adviser’s office fast!

Even if filing bankruptcy is not the best choice for a given situation, there are more productive strategies for dealing with debt than payday loans. Believe me, after almost twenty-five years of working with tens of thousands of debtors and their families, helping them rebuild their financial lives, I know about payday loans. I have three words to say: “Don’t Go There!”