(RNS) Amanda giggled nervously as she stood in front of the room packed with pastors, adjudicatory heads and laypeople of several faiths. She admitted she felt like a fool for borrowing from a payday lender.

A bill was due and she faced late fees. Amanda chose to take out a short-term payday advance loan, figuring she would be able to pay it once she received a state check she expected. But when the loan came due two weeks later, she took out another to cover it. Soon she began relying on payday loans to meet her obligations.

She admitted she was juggling three payday loans and a finance loan. She wanted out of the debt cycle, she said, but just didn’t know how.

Payday advances were designed to be small, short-term loans to be used in an emergency. Though laws differ state to state, most loans are granted for only 14 days. To receive funds, a borrower postdates a check for the loan amount plus the lender's fee, intending to repay the loan on his or her next payday—hence, the name.

The annual percentage rates allowed also vary by state—from as low as an average of 17 percent to as much as 574 percent. However, rates can rise much higher.

The APR on payday loans in Missouri in 2010 averaged 444.61 percent, according to that state’s division of finance. But Missouri’s effective percentage rate can rise to 1,950 percent, depending upon fees charged and the number of times the loan is rolled over.

If the borrower cannot repay the loan, he or she may be allowed to renew it. Again, the practice varies by state. Some allow only one loan at a time, with a waiting period of as little as a day or as much as a month. A few states, such as Florida, track loans electronically in real time.

Payday loans are often easier to obtain than traditional loans. Lenders either do not perform a credit check or have fewer restrictions to qualify.

The Durham, N.C.-based Center for Responsible Lending estimates 12 million people get trapped in debt every year because of high interest. Borrowers often pay only part of the interest and fees without making a dent in the loan itself.

At the due date, the lender sends the check through to the borrower's bank. If it does not clear, the borrower faces bank overdraft fees and a late fee to the lender. Often in spite of state laws, a lender will send a check through repeatedly, racking up additional fees.

The industry argues that without short-term loans, consumers would be forced to look for higher-cost alternatives and would end up paying more in late fees.

Lenders also cite analyses to support the continued need for unsecured loans.

In a study, Kelly Edmiston, senior economist for the Federal Reserve Bank of Kansas City, claimed that “restrictions could deny some consumers access to credit, limit their ability to maintain formal credit standing, or force them to seek more costly credit alternatives.”

He addressed some of proponents' concerns about the debt trap. But he focused on the effects of banning the industry altogether, particularly among consumers who don’t qualify for traditional credit.

Edmiston also claimed defaulting on a payday loan generally would not hurt a borrower's credit standing. The loan fee might be lower than a late payment fee, as well, he said.

“But the issue is that it’s marketed as financial help,” Diane Standert of the Center for Responsible Lending said. “The payday lender is holding your bank account hostage…. [That loan] must be paid back first.”

Faith representatives gathered in Jefferson City, Mo., that evening were looking for ways to change laws, they believe, contribute to the debt spiral in which Amanda felt trapped.

But she didn’t have to remain in the debt cycle much longer. Moved by her story, attendees pooled funds. Supplemented by a local interfaith charitable organization, the gifts totaled enough to cover her payday loans.

Many caught in the trap haven’t been as lucky.
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