With foreclosures at historically high rates across the country, some homeowners feel that they have no other option to save their home other than taking out more loans. Some end up taking out payday advance loans, which is almost universally a bad idea for people facing a financial hardship or foreclosure. A growing use of these loans will delay any recovery in the economy, rather than stimulate growth.
Once homeowners take out a payday loan to make the mortgage, they can quickly fall into a cycle of not having enough money to pay back one or the other, and then not having enough money to pay back either loan. Even if the loan is only a few hundred dollars, interest rates can be several hundred percent, and the term of the loan is usually very short. Homeowners may not want to put themselves in a position where they only have two weeks to pay repay a loan with an annual 800% interest cost.
However, the rise of this kind of loan is coinciding with the decline in lending by traditional sources. Banks are experiencing their own credit crisis, and homeowners who bought or refinanced a home within the past few years may not have enough equity for a foreclosure refinance or other solution. Thus, increasingly desperate homeowners in danger of foreclosure are turning to the cash advance and payday loan outlets, instead of attempting to work with a bank that is no longer responsive to their credit needs.
What should not surprise too many people, though, is that the banks also have ownership interests in these payday loan providers. Traditional lenders may not own them outright, but they do profit when homeowners take out short-term loans with astronomical interest rates in order to pay back their long-term mortgages with lower (but increasing) rates. Banks profit from making bad loans to people who can not afford the loan, and then make even more money when these mortgages go into default and the homeowners turn to payday loans to stay afloat.
The homeowners then may end up with both their foreclosing bank and the payday loan outlet aggressively attempting to collect on these loans. Even if they are able to find a way to stop foreclosure on the house, the cash advance loan may push them into danger of bankruptcy, collections, or further judgments and lawsuits. We have received emails from homeowners in exactly this situation, who first had taken out numerous payday loans in order to pay the mortgage, but ended up having to take out more of them just to pay back the previous ones. This may go on for several years before their savings are completely wiped out and they can no longer keep on top of their finances.
The propensity of people who are unable to manage their finances, with or without a hardship, and the increase in reliance on payday loans will only make the foreclosure crisis worse. It is no wonder banks are unwilling to work with homeowners to stop foreclosure, though, as they will make money when these families take out cash advances on their paychecks in order to pay the mortgage. Homeowners who have been taken advantage of in their mortgage loan should be extremely cautious of being taken for another scam through feeling as if they have no other choice than to take out a payday loan.