What if you can't pay back a payday loan?
The first thing that will happen is the payday loan company will try to deposit the check you left them,or make an ACH withdrawal if you authorized that. If there isn't enough money in your account, you'll be charged whatever your bank charges for insufficient funds,usually around $25 or $30.
So if you know there won't be funds in your account, try to contact the payday lender before the due date, to avoid that fee. If it's just a delay of a few days, like a paycheck is coming but it will be a couple days late, it'll save you the insufficient fund fee to work out any way you can to borrow the money temporarily for a few days.
If it's a bigger problem and you won't be able to pay the loan back for a few weeks, some states allow payday loan companies to roll over the loan into another one, while other states don't.
It's best to avoid rolling over the loan or taking out another one with another company, because they'll charge you fees all over again. Still, paying $15-$20 for another loan is better than ignoring the problem and paying an insufficient-fund fee plus the cost to roll the loan over.
Then try to work out some way of dealing with all your debts, so you won't run into trouble again. You can check out services that help you consolidate or cut your debt and improve your credit score.
Asking for an Extended Payment Plan
But better yet is to talk to the payday loan company about an extended payment plan. If the payday lender is a member of the CFSA, they need to agree to it as long as you ask in time.
For more information on what the plan requires and how to get it, see this article about the CFSA rules.
Even if the loan company isn't a CFSA member, your state may require it to offer an extended payment plan, or they may do it voluntarily.
In general, with an extended payment plan, you'll pay no extra fees and you'll be allowed to pay the loan back over the next few paydays. It's a great deal, so if you get one, don't blow it, because the fees and collection hassle will start up all over again.
Check with your state's attorney general's office to see if an extended payment plan is required where you live. Virginia, for example, has a handy pdf brochure outlining the procedure.
Closing Your Bank Account
If you've already defaulted on a payday loan and they're already taking fees and interest out of your bank account each payday, you may be tempted to just close the bank account to end the problem.
Talk to your bank first, because policies differ. You may be able to block withdrawals from your account by freezing it so you can keep it open while you work things out. That's good, and better than having to close it.
Or you may not even be able to close it to prevent the payday loan company from taking their money, because some banks have a policy that an account will be automatically reopened if an ACH withdrawal or a check is presented within a certain time after you ask it to be closed. Then you'll be hit with an insufficient fund fee on top of everything else. So find out what the policy is.
And, also, closing the bank account doesn't solve the underlying problem. The payday loan place will keep trying to collect the money, which means the calls will continue, and they can turn it over to a collection agency also, or sue you in court.
If the payday loan company is operating illegally, you only have to pay the principal and not the other fees. There are illegal companies that aren't registered to do business in your state, especially when you get into internet loans. Search online for your state and payday loan laws, internet payday loans in particular. For example, in Iowa, payday lenders need to have a physical presence in that state to be licensed.
If this has gone on several months, you may have already paid back more than the principal, but here's the problem: you're not the first to claim the company is operating illegally. And they've probably dealt with that problem by putting in a disclaimer, for example, that when you go to their website, you're choosing to do business with them under the laws of whatever state they're in, not your state. Or they may be doing business perfectly legally under some special law, like Credit Service Organizations in Texas that can't give payday loans but can give similar loans.
So they'll be ready for your objection, but they also may not feel like fighting it in court, and they actually may be illegal. In the video, Arizona attorney general Terry Goddard described in 2010 how he plans to go after illegal lenders in his state.
Whether you close your account or not, write the payday loan company and say you believe they're illegal in your state (if you think they are), and therefore you're not obligated to pay back more than the principal, which you've already paid, so you want the loan considered paid in full. Say that you no longer authorize them to withdraw from your account, or take money from your wages (if they're doing that). I'm not a lawyer, so consult a lawyer in your state to get all the details. Your state's attorney general's office may have information already available, since you may not be the only one that an illegal lender loaned money to in your area. Here's an example from Kentucky.
Ask for a Settlement
If you don't think they're illegal but you just want them to stop withdrawing money, write and say that you can't pay the full amount, but you want to work out a settlement. Offer to pay the principal if you haven't paid it in full yet, if they'll agree to stop charging additional fees. Or ask for an extended payment plan. Or if you've already paid way more than the principal, ask that they consider it paid in full due to the excess amount you've paid and the fact that you can't afford to make payments anymore.
You may hear back with an agreement or a compromise, and you can decide what to do. If the company is actually doing business illegally, your state's attorney general may be able to help.
If they're legal and only charging you fees that you agreed to on the contract, well, darn it, you do owe the money and they can sue you to get it (in civil court, not criminal court, at least). You don't want it to come to that unless you have a really idea how to win the case, so try to compromise, and make sure you get in writing that you'll be paid in full if you do whatever you agree to. Stop the ACH withdrawals either through your bank or by revoking permission and pay by money order, and you're done.
Phone Calls and Lawsuits
If you close your bank account and don't work out an agreement, their next step will be to continue collecting by contacting you and maybe suing you if they think the money is worth it. Third-party debt collectors are controlled by the FDCPA while original lenders (the payday loan company itself) are controlled by state law, and you can use those laws to help stop the phone calls, but it won't prevent them from suing you.
If you get notice that you're being sued, you'll need to respond or get a default judgment against you. If you get a default judgment against you, or lose the suit, you'll probably owe court costs and can have your wages attached and other nasty things. So you may want to try again (or try for the first time) to compromise with some kind of settlement to avoid actually going to court.
Wherever you are in all those stages, there's a way out. The first step is to take some kind of action before things get worse, and figure out a solution. It's not easy, but you can get control of your finances and get beyond this problem.
9:37 p.m. March 17
If you think a pdl is illegal in your state, write them and say you'll file a complaint with the attorney general. They marked my loan paid in full. They're only interested in going after the easy money,don't want to fight somebody who stand up against them.
10:00 p.m. March 17
I have six laons out with different companies. Can't believe I got in this mess. How do I find out if they're illegal?
10:51 p.m. March 17
It'll depend on your state laws. Don't you hate hearing that? But every state law is different. Try searching for the name of the company and your state and "illegal" to see if anybody's already done the research. Or search for your state and payday loan laws and see if you can find the laws concerning online or out of state payday loans and whether the companies have to register to do business in your state or if they're legal in your state at all. Another angle is to contact your state attorney general's office and see how you find out if a lender is registered to do business in your state.
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