Before taking out a payday loan, you should fully understand how these loans work, consider the costs involved, and know that lenders could be illegally taking advantage of you. You might change your mind about getting one. Not only should you beware of payday loans in general, but you should also be especially wary of lenders that might be skirting the law by going through a state with looser lending laws or operating offshore.
If you've applied for and received a payday loan, you might have agreed to let the lender automatically withdraw the payment from your bank account. You have the right to stop the automatic withdrawal before it happens. Here's how:
As a last resort, you can close your bank account to avoid the automatic withdrawal. Be aware that stopping automatic withdrawals doesn’t mean you don't have to repay the loan. You should try to negotiate other payment arrangements with the lender to avoid your account going to a debt collector.
Payday loans are short-term loans for smaller amounts—typically $500 or less—which you have to repay on your next payday or when you get income from another steady source, like a pension or Social Security. The annual percentage rate (APR) on payday loans often ranges from 200% to 500%—or even higher. Triple-digit APRs are the norm when it comes to payday loans, which is exponentially higher than what traditional lenders typically offer. Depending on your state’s laws, you might be able to get a payday loan in a store by giving the lender a postdated check, in person by providing the lender access to your bank account, or online.
Qualifying for a payday loan is quite easy. Ordinarily, you’ll have to show proof of your income, like two recent pay stubs, and meet other qualifications, such as having a bank account or prepaid card account, a working phone number, a valid government-issued photo ID (like a driver’s license), and providing a Social Security number or Individual Taxpayer Identification number. But in most cases, the lender won’t do a credit check to look at your credit score or review your credit report.
Some states have laws regulating payday lending and, as of late 2020, federal law further regulates payday lenders.
State law sometimes limits the amount a lender can charge for a payday loan, limits the repayment period, or limits the maximum amount a borrower can take out. In specific states, payday lending is illegal.
Payday lenders sometimes associate with Native American tribes, cross state lines, or operate offshore to avoid state laws.
Associating with Native American tribes. Usually, you should beware of payday lenders who've affiliated themselves with Native American tribes. These lenders often claim they don’t have to comply with state laws because of sovereign immunity. Generally speaking, under the doctrine of tribal sovereign immunity, a tribe can’t be sued by a state, a private party, or other governmental authority unless the tribe consents or Congress allows it.
Here's how this kind of set-up works: A payday lender teams up with a Native American tribe—usually a small, cash-strapped one consisting of around a few hundred members—then offers loans over the Internet. It then ignores state interest-rate caps and other laws that restrict payday lending by claiming sovereign immunity.
Often this practice is illegal, and courts are increasingly cracking down on rent-a-tribe affiliations. In 2018, according to a press release from the United States Attorney’s Office for the Eastern District of Pennsylvania, a man was sentenced to more than three years in prison and ordered to pay around $10 million after using a Native American tribe to circumvent state payday lending laws. In that case, the defendant admitted that he paid a California-based tribe to pretend that it was the actual payday lender to get around Pennsylvania state law. Under Pennsylvania law, payday loans are illegal (63 Pa. Stat. Ann. § 2325), but the defendant claimed sovereign immunity after associating with the California tribe and charged rates exceeding 780%. The defendant ultimately pleaded guilty to one count of conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act (RICO) arising from participation in a conspiracy to collect debt from payday loans, among other things.
Internet-based payday lenders. Some Internet-based payday lenders conduct online transactions across state lines claiming that they don’t have to comply with state laws and licensing requirements. In response, some courts have upheld a state’s right to regulate out-of-state, Internet-based lenders that make loans to that state’s residents—even when the lender does not have a physical presence in the state. In fact, courts frequently reject payday lenders’ attempts to avoid complying with state law by claiming that another state’s law applies.
Offshore lenders. Other online lenders operate their business from overseas, which makes it difficult, if not impossible, to enforce state laws.
Federal regulators have established a rule that sets a nationwide set of minimum protections for consumers regarding payday loans. The federal law, effective November 19, 2020, is called the "Payday Lending Rule."
The Payday Lending Rule includes, among other things, a “debit attempt cutoff” for certain payday loans. Under the rule, after two unsuccessful attempts to debit the borrower's account, the lender can’t debit the account again unless the borrower provides a new authorization. The lender also has to give consumers written notice before attempting to debit an account at an irregular interval or amount. (12 C.F.R. § 1041.8).
If you've given a payday lender the right to take payments out of your bank account automatically, you can stop these automatic payments. Here’s how.
The first step in stopping an automatic withdrawal is locating the portion of your agreement that allows the lender to automatically withdraw the payments. This information is typically found in the promissory note, and could be captioned “Automated Clearing House Credit and Debit Authorization Agreement” (ACH Authorization). This section contains your agreement to pay the loan by automatic withdrawal, and must also describe how you can stop the payments.
All authorizations for automatic withdrawal must describe how to stop the payments (called "revoking authorization"). If your ACH Authorization doesn't specify how automatic withdrawals can be stopped, it's invalid. You might be entitled to a refund of any funds already paid under an invalid agreement. Let your bank know that the lender’s agreement wasn't valid, and that you want it to recover any funds already paid.
You must follow the instructions contained in the ACH Authorization to stop the automatic withdrawal. Typically, the ACH Authorization will have a deadline by which you must notify the lender to stop the scheduled withdrawal. You should send the letter to the lender’s address by certified or express mail, and keep a copy of your receipt with the tracking number so you have evidence your letter was delivered.
Your letter should include the date, your name, your address, and your account number with the lender. If you can, include a copy of the ACH Authorization. The earlier you send this letter, the better. The Consumer Financial Protection Bureau (CFPB) provides a sample letter you can use.
You should provide your bank with a copy of the letter that revokes your authorization for automatic withdrawals. The CFPB also provides a sample letter for notifying your bank that you've told the lender to stop withdrawing money from your account. Once you notify your bank that you have revoked your authorization of the automatic withdrawal, it must block all future payments, as long as you provide the notice at least three business days before the scheduled payment. The bank shouldn't charge a fee for this service.
Asking your bank to stop payment (described below) is a different process.
Your bank is required to stop payment on an automatic withdrawal if you give it at least three business days’ notice in person, over the phone, or in writing. Notifying your bank by phone at least three business days before the payment is scheduled is sufficient to stop the transfer, but your bank might also require that you put your request in writing. If the bank asks for a written order, you must provide it within 14 days of your oral notification. Many banks have online forms that you can complete to stop withdrawals. And, here's a sample letter from the CFPB for submitting a stop payment order. Generally, banks will charge you a fee for stopping payment.
It's important that you provide your bank with accurate information about the date and amount of the transfer. If possible, you should provide the bank with a copy of the ACH Authorization. If, at any point, you're unsure if what you’ve done is sufficient to stop the transfer, consult with your bank.
To stop future payments, you'll probably have to send the bank a written notice and include a copy of your revocation to the payday lender.
You should close your bank account to stop the transfers only as a last resort. You might have to do this if:
You should ask your bank whether closing the account is necessary.
After you revoke your authorization or stop a payment, be sure to monitor your accounts to see if an unauthorized payment gets withdrawn from your account. File a complaint with the CFPB if you experience any of the following.
The CFPB is a federal agency that enforces regulations applicable to payday lenders, banks, and other financial institutions. The CFPB will work with your lender or bank to resolve your complaint. You may also contact your state regulator or .
Again, keep in mind that stopping an automatic bank withdrawal doesn’t mean you don't have to repay the loan. Consider working out other payment arrangements with the lender to avoid your account going to collections.
If you're having financial troubles, consider other options instead of taking out a payday loan, like:
To find out about the payday lending laws in your state, see the National Conference of State Legislatures website. To get an explanation about applicable payday loan laws, consider contacting a consumer protection lawyer.