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.
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.
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 or credit union. 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. The best approach is to talk to your bank about the ACH withdrawals and ask for the forms you must use to cancel the ACH withdrawals. Complete the ACH cancelation forms, and return them to the bank. Alternatively, open an account elsewhere.
Once the account is closed or the ACH payment authorization is canceled, the borrower can 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.
Learn Your State’s Payday Loan Laws
Check out the payday loan information on the Bills.com payday loan information by state page, where you will find how states attempt to regulate deferred deposit loans. Learn the specific regulations for payday lenders in your state, and if you live in a state 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.
What a Payday Lender Can Do If You Do Not Repay Your Loan
If you do not repay a payday loan, the payday loan company has several legal remedies. These include:
Before a creditor can apply these remedies, it must file a lawsuit against you first. See the Bills.com resources Collections Advice to learn more about the rights of creditors and debtors, and Collection Laws & Exemptions by State to learn more about debt collection laws that apply to you.
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.