Protecting Yourself From The "New" Payday Loan
Due to the lack of conventional credit access right after your bankruptcy discharge, you may be tempted to take on short-term loans with high interest rates. Most post-bankruptcy debtors already know about the dangers of predatory payday loans; but what about the new and "improved" versions of payday loans offered by traditional banks?
Many banks are now offering short-term loans to their direct deposit customers. The loans are usually called "deposit advance" loans because they use the debtor's expected paycheck deposit as collateral. The debtor takes out the loan and then the bank automatically deducts it, plus interest from their next paycheck direct deposit. This may sound like a sweet deal for post-bankruptcy debtors short on cash but the interest rates on these loans can be as much as 300%. Yes, that's much cheaper than a payday loan but a lot more expensive than a credit card. And if a post-bankruptcy debtor isn't careful they could find themselves taking out one loan after another, racking up outrageous amounts of fees.
Below are a few tips on how debtor's exiting bankruptcy can protect themselves from this new type of payday loan:
- Understand that a payday loan by any other name is still a payday loan. If your bank is offering to loan you your paycheck, then it's a payday loan and the same caution should be used when considering it.
- Create an emergency fund instead. We know that emergencies will happen after bankruptcy as they are a part of life. That's why you need to prepare once you exit bankruptcy. Even $1,000 in cash can help you avoid payday loans and their cousins.
- Use a secured credit card instead. If you just absolutely must borrow from your paycheck, it will be better to use a secured credit card instead because they interest rates are lower or non-existent if you repay it before the grace period has passed.