I'm a NY state resident. I took out a few Internet payday loans back in February and, I've paid well past the principal balance on both these loans, hundreds more. I'm not sure what I can't afford to pay these loans any longer. Do you have any advice as to what I should do next?
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 so that the accumulated fees equal an effective annualized interest rate of 390% to 780% APR depending on the number of times the principal is rolled.
One slightly light-hearted fact regarding payday loans: Wikipedia.org, the leading online encyclopedia, list payday lending under Loan Shark, stating that "if the defining characteristics of loan sharking are high interest rates and a credit product that traps debtors, then the label certainly applies."
The Federal Trade Commission offers a great Web page regarding payday loan alternatives.
A payday lender may attempt to collect the balance itself. If the borrower defaults, 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, contacting your neighbors, or getting a warrant for your arrest. Failing to repay a debt is a civil matter and not criminal. A common threat many payday lenders use is arrest for check fraud: This is a groundless threat 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 Privacy Rights Clearinghouse Debt Collection Law Guide.
If the payday loan company sells an 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 Collections 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.)
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.
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.
To learn more about your rights as a New York resident, read the Bills.com article New York Collection Laws.
New York has several laws prohibiting payday loans. Under New York General Obligations Law § 5-501 the civil usury cap is 16% APR. Under New York Penal Law § 190.40 and 190.40 the criminal usury cap is 25% APR. Check cashers are prohibited under New York law from cashing checks with deferred dates.
If payday lending is essentially illegal in New York, how do payday lenders operate openly in the state? Some New York payday lenders partnering with banks located in deregulated states. These lenders deliver loans via electronic funds transfer and claim the local storefront is brokering loans for the bank that is exporting its home state interest rates and other terms to New York. This is called rent-a-bank lending.
The New York City Dept. of Consumer Affairs Tips about Payday Loans outlines New York law, and offers suggestions on how to avoid payday loans. See also New York State’s Avoiding Dangerous or ‘Predatory’ Loans.
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, 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 no-cost Bills.com Financial Planning and Budget Guide, which can help you manage your finances and you can learn about budgeting and prudent financial management.
I hope this information helps you Find. Learn & Save.