- Payday loans are usually small loan amounts that must be repaid in full when the borrower receives the next paycheck.
- The borrower will also be required to pay any lender fees at the time of repayment.
- Payday loans usually come with very high interest rates and fees.
Everything You Need to Know About Payday Loans, Why to Avoid Them, & How to Repay Them.
Are you considering a payday loan? If so, be very careful. Payday loans, often called cash advance loans, check advance loans, or deferred deposit loans, come with astronomical interest rates and fees. Payday loans should be your last resort if you need to borrow money.
What is a Payday Loan?
These small loans, also called "cash advance loans," "check advance loans," or "deferred deposit check loans," are a frequent pitfall for consumers. A fee anywhere from $15-$30 per $100 borrowed is charged for an average loan of $300. The borrower will give the lender a post-dated check, which the lender later uses to electronically transfer a payment or the entire balance of the loan from the borrowers account.
An especially insidious practice is to withdraw a partial payment from the account as a "customer service." This partial payment becomes a perpetual installment that continues despite the borrowers' best efforts to halt it.
With rates so high and the term of the loan so short there is no wonder that a very high percentage of these loans are rolled over by the borrower again and again. Be aware that the accumulated fees for payday loans can have an effective annualized interest rate that of 780%, or higher, depending on the number of times the principal is rolled over.
The Federal Trade Commission offers a great Web page regarding payday loan alternatives.
Payday Loans and Consumer Rights
A payday lender itself may attempt to collect the balance. Alternatively, the payday lender may sell the debt to a collection agent, which we discuss later.
If the payday lender (or collection agency, for that matter) cannot convince you to pay through standard collection tactics, such as phone calls and letters, the payday lender may decide to file a lawsuit against you to obtain a judgment for the balance of the debt. If the lender sues and obtains a judgment against you, it can then take steps to enforce the judgment as allowed by your state law in civil court. The most common methods of enforcing a judgment are wage garnishment, bank account levies, and property liens.
Note that not on this list of enforcement actions are:
- Calling your employer to discuss the debt
- Contacting your neighbors
- Filing an arrest warrant
An important fact: Failure to repay a payday loan is not a crime! Aggressive payday lenders threaten borrowers arrest for check fraud: This is groundless unless the payday lender has evidence to prove the borrower never intended to repay the payday loan. Proving that is very difficult. Remember, no one has been arrested or imprisoned for debt in the United States since the Civil War.
To learn more about debt collection laws in your state, see the Bills.com resource Collection Laws & Exemptions by State.
If the payday loan company sells a collection account to a collection agent, the borrower is now obligated to repay the balance to the collection agent.
A federal law called the Fair Debt Collection Practices Act (FDCPA) states that a third party collection agent must stop calling you if you notify them in writing to do so. Several states, such as California, New York, and Texas, extend many of the regulations in the FDCPA to cover original creditors as well. See Advice If You’re Being Harassed by a Collection Agent to learn what actions you can take if you believe a collection agent is violating the FDCPA.
If the payday loan company sells the account to a collection agent, the debtor can stop the telephone calls by sending a cease communication demand letter, commonly called a cease and desist notice, to the collection agent. (See the Bills.com debt self-help center for sample cease-and-desist letters.)
How Can I Handle Payday Loan Collections?
Many payday loan collectors use intimidation to strike fear into borrowers. Just because a person is in debt does not mean that person loses their rights as a consumer. Not repaying a debt is a civil law and not a criminal law matter.
As mentioned above, many payday lenders require borrowers to provide their checking account numbers so that payments can be withdrawn from the borrowers’ accounts automatically using the Automated Clearing House (ACH). In instances where the borrower accounts lack sufficient funds, the payday lender will continue to attempt withdrawals. This may create overdraft charges for the borrower, and if done often enough, the bank may close the borrower’s account.
One common tactic to deal with payday lenders who repeatedly withdraw funds from a borrower’s account is for the borrower to close the account and reopen another at the same bank. This is effective unless the bank links all transactions from the old account to the new one. If that happens, when the payday lender makes a withdrawal, the bank simply reaches into the new account to remove the funds. The lesson here is to make sure the bank does not allow electronic withdrawals from the old account to be transferred automatically to the new account. Alternatively, open an account elsewhere.
Once the account is closed, the borrower can create and negotiate a repayment plan with the lender. There are eight states whose payday loan regulating statutes requires lenders to set up an installment repayment plan if an account reaches the maximum number of rollovers allowed by law and the debtor declares that he/she is unable to pay the balance due.
Check out the payday loan information from the Consumer Federation of America for payday loan information, where you will be able to read all about payday loans and the various state attempts to regulate them. Follow the "state information" link to find out the specific regulations for payday lenders in your state, and if you live in one of the eight states requiring installment payments.
If your state does require repayment plans, and the lender still will not accept a payment plan, call your state's regulator of payday loans, usually an assistant Attorney General, and complain. You should get the results you want after the Attorney General’s office becomes involved.
If you are not in one of those states, consider simply making payments to the lender anyway to pay down the balance of the loan over time. In most states, the rollover limit will soon be reached, and the interest rate the lender can charge will be capped by state law. If the lender will not accept your payments, simply put what you can afford aside until you have enough money to either payoff the loan or to offer a settlement.
Read the regulations in your state to find the best strategy for your situation. To learn more about tactics and strategies for dealing with creditors, read the Bills.com article Debt Negotiation and Settlement Advice.
Bills.com also offers more information on the Payday Loan Information page, and has answered reader questions about payday loans in California, Florida, Illinois, Massachusetts, Missouri, New York, Texas, and Virginia.
If you do not repay a payday loan, the payday loan company has several legal remedies, including wage garnishment, levy, and lien. See the Bills.com resource Collections Advice to learn more about the rights of creditors and debtors.
See also the free Bills.com Financial Planning and Budget Guide, which can help you manage your finances and you can learn about budgeting and prudent financial management.
Jamaica, NY | October 27, 2011
October 27, 2011
Kernersville, NC | October 22, 2011
October 24, 2011
My guess is that you will have to remit the $250, but hear what the Attorney General's office has to say.
Apex, NC | October 14, 2011
October 14, 2011
Snellville, GA | November 02, 2011
November 02, 2011
Find out what your obligations are — whether you have to repay the amount you borrowed or if you can take action against the lender.
Enterprise, NV | October 13, 2011
October 14, 2011
Tempe, AZ | October 03, 2011
Phoenix, AZ | September 27, 2011
September 27, 2011
Woodland Hills, CA | September 22, 2011
September 22, 2011
You asked if you have any options. Your only option is to negotiate a delayed payment.
Woodland Hills, CA | September 22, 2011
September 22, 2011
You mentioned in your earlier message that several debts are overwhelming you. Ask the lawyer you meet about bankruptcy, and if you qualify for chapter 7 bankruptcy. Also ask about your alternatives to bankruptcy.
Campbell, MO | September 16, 2011
Dallas, TX | October 02, 2011
Highland, CA | August 29, 2011
August 31, 2011
Keep in mind that there are debt collectors that use lies and threats to get people to pay. Do your homework. Check out the agency's reputation online. Check with the state agency that regulates payday loans in your state. Lastly, never pay on a debt you are not sure you owe, before validating the debt.
Forest, VA | August 23, 2011
August 24, 2011
Make sure to read the part about the FDCPA, as you can stop calls at work, if you take the right steps.
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