What is a 'debt trap'?
Jan Meriss Alfonso Assistant at Ascent Law LLC A debt trap A debt trap is when a lender makes it difficult for you to pay back your debt, but easy for you to keep taking on more. Let's use payday loans as an example. Payday loans are short-term loans that are designed to be paid back by your next paycheck. The way they work is that a lender will give you money, which you'll pay back after you get paid. This sounds like it could be a good deal, right? It's not! Because payday loan companies have no incentive to help you make the payments on time, they charge high-interest rates and fees that can easily snowball into an overwhelming financial burden. What happens in a typical payday loan transaction You borrow $500 and agree to pay it back in two weeks, with $25 in interest and $75 in fees. The problem is that if you're late making just one payment to a payday lender, you'll start paying fees for every single one of your subsequent payments. That means that instead ...