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.
And 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 an automatic withdrawal before it happens.
Payday loans are short-term loans for smaller amounts—typically $500 or less—which you must 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 scores or review your credit reports.
Some states have laws regulating payday lending. State law sometimes limits the amount a lender can charge for a payday loan, the repayment period, or 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.
Usually, you should beware of payday lenders affiliated 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 setup 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 restricting payday lending by claiming sovereign immunity.
Often, this practice is illegal, and courts are increasingly cracking down on rent-a-tribe affiliations.
Some internet-based payday lenders conduct online transactions across state lines, claiming 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 has no 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.
Other online lenders operate their business overseas, making it difficult, if not impossible, to enforce state laws.
To stop automatic payments on a payday loan, you can:
You can close your bank account to avoid an automatic withdrawal as a last resort. But 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.
If you've given a payday lender the right to take payments out of your bank account automatically, you can stop these payments. Here’s how.
Verify the Instructions in the ACH Authorization. The first step in stopping an automatic withdrawal is locating the portion of your agreement that allows the lender to withdraw the payments automatically. 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.
Follow the Instructions in the ACH Authorization. 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.
Provide a Copy of the Letter to Your Bank. 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 must 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 requests 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. You should provide the bank with a copy of the ACH Authorization if possible. 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, 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 state attorney general.
Under federal law, you can dispute an unauthorized transaction and get your money back if you notify your bank in time. You can use the CFPB's sample letter to notify the bank.
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 learn about your state's payday lending laws, see the National Conference of State Legislatures website. To get an explanation about applicable payday loan laws, consider contacting a consumer protection lawyer.
]]>When unpaid bills start piling up, here are seven things to remember.
If left unpaid, some types of debt have more dire consequences than others. (To learn why, see the "Secured Loans Deserve Extra Attention," section below.) What's more, the type of debt you have often dictates your options and your best strategies.
State programs, like Homeowner Assistance Fund programs, might offer relief to homeowners struggling to keep up with mortgage payments and facing foreclosure. Also, almost all lenders and servicers provide loss mitigation (foreclosure avoidance) options, like loan modifications, forbearance agreements, and repayment plans, to borrowers having trouble paying.
Regarding medical debts, some individual medical providers are eager to work with patients that can't pay.
And if you have student loans, it pays to learn about government programs that may provide relief, like cancellation options.
If you have some income left over after you've paid all your basic monthly expenses, you might be able to get yourself out of debt trouble. The path can be slow and arduous, but you can be successful with hard work and diligence. Here are some options to consider.
Start by making a budget that includes all of your income and expenses. Explore ways to reduce spending and costs and, if possible, increase your income. Then, revise your budget accordingly. Next, using your budget as a guideline, come up with a realistic dollar amount that you can devote to paying your debts each month.
Be sure to prioritize your debts and expenses, listing those essential to pay—like the mortgage, utility bills, and child support—and those that might be less important, like department store charge cards or loans from family and friends.
Generally speaking, paying secured debts is more important than paying unsecured debts. For example, if you don't want to lose your home to foreclosure, getting current on your mortgage should be a priority.
However, not paying your department store charge card bill for a while might be wise if you can pay on a car loan, especially if you need your car to get to work.
Whatever you do, don't hide your head in the sand or sweep your bills under the bed. Even if you have no income, contacting your creditors and letting them know your situation almost always makes sense. Some creditors might be quite willing to work with you. They could agree to a payment plan, allow you to skip a few payments and tack them onto the end of a loan term, or waive late fees.
The exception to this advice is if you are going to file for bankruptcy or are "judgment proof" and don't plan to repay your debts. You're considered judgment proof if you have no income or assets that creditors can seize if they sue you and get a court judgment against you. Because you won't be working with your creditors in these situations, there's often no point in communicating with them.
If you need money-management education or budget counseling, consider getting help from a nonprofit credit counseling organization. These agencies can also suggest options for getting out of debt, provide housing counseling, and refer you to other agencies that offer specialized help. Some credit counseling agencies can contact your creditors to set up payment plans or create a debt management plan.
Before you get help from a credit counseling agency, check out the company's credentials. Not all agencies are legitimate. Some charge excessive fees, fail to perform promised services or provide bad advice. The National Foundation for Credit Counseling website is a good place to start looking for a legitimate credit counseling agency.
If you want to clean up your credit file, steer clear of credit repair clinics. These companies claim they can fix your credit, qualify you for a loan, or get you a credit card. But you shouldn't have to pay for these services: These companies do the same things you can easily do yourself.
And some companies use illegal tactics that can land you in hot water.
Bankruptcy is an affordable and surprisingly easy federal court remedy that frequently allows debtors to get rid of their debt and start over without paying anything back. Bankruptcies can generally be described as "liquidation" (Chapter 7) or "reorganization" (Chapter 13).
Under a Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out (discharge) the debts you owe. But keep in mind that not all debts are dischargeable, and not everyone qualifies to file for Chapter 7.
Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court detailing how to repay your creditors. You must repay some debts in full; other debts may be repaid only partially or not at all, depending on what you can afford. If you are inclined to pay back some or all of your debt, Chapter 13 bankruptcy may be a better approach to managing debt than a debt management plan.
For a comprehensive guide on dealing with financial problems, including how to prioritize debts, budget your money, negotiate with creditors, avoid foreclosure, and more, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo).
]]>Avoid most fast-cash alternatives, like payday loans, high-interest personal loans, debt consolidation loans, and car title loans, when you’re in this situation. If you make a poor choice, you might find yourself deeper in debt.
While a payday loan might seem like a great way to obtain money quickly, you should know that these loans have significant downsides, including punishing interest rates and short repayment time frames. Once you fully understand how they work and consider the costs and risks involved, you might change your mind about getting one.
A "payday loan" is a short-term loan from a payday loan company or online vendor—not a bank—that usually becomes due on your next payday or the next time you receive income from some other regular source, like Social Security. Typically, payday loans are relatively small, around $500 or less.
State laws, like in Florida, sometimes limits the amount a lender can charge for a payday loan. State law might also limit the repayment period or the maximum amount a person can borrow. Some states have gone as far as making payday lending illegal.
Depending on your state’s laws, you might be able to take out a payday loan in person (by using a postdated check or giving the lender access to your bank account), over the phone, or online.
Qualifying for a payday loan is relatively 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. You might also have to provide 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.
A payday loan could cost you a lot of money, especially if you roll it over. “Rolling the loan over” means you pay a fee to delay paying back the debt. Each time you roll the loan over, you pay more.
According to the Consumer Financial Protection Bureau, about 70% of people who get a payday loan end up taking out another loan within 30 days, and 20% of new payday loan borrowers take out ten or more payday loans in a row. This practice can lead to a treadmill of debt that costs you a lot of money.
Example. Suppose you borrow $400 from a payday lender today. The lender charges a fee of $15 per $100 borrowed, so you'll have to pay the lender $460 in a couple of weeks. Unfortunately, you can't afford to repay the payday loan when the due date comes around. So, because your state doesn’t ban or limit loan renewals, you roll it over and push the due date out by another couple of weeks. To do this, you have to pay another $60 fee. When the loan comes due again, you pay the lender the $520 you owe. You've now spent $120 to borrow $400.
The annual percentage rate (APR) on even one payday loan is astronomical, ranging from 200% to 500% or more. Continuing the example above, the APR on a two-week loan with a $15 fee per $100 borrowed is around 400%.
Personal loans with high interest rates have become readily available online as internet lenders target people struggling to pay their bills. Generally, you should avoid these loans.
Unlike car loans or mortgages (or deeds of trust), personal loans don’t require you to pledge collateral in exchange for borrowing money. To qualify for this kind of loan, you go online and provide basic personal information, like your name, address, Social Security number, and bank account number.
Online lenders tend to offer personal loans for amounts starting between $1,000 and $3,000. The interest rate you’ll have to pay on the borrowed amount is based mainly on your credit score.
But the lender might also consider other factors like income, occupation, and education level. If you have bad credit, you’ll likely still receive the loan, but you’ll have to pay a higher interest rate.
Lenders also sometimes charge an origination fee, usually between 1% and 5% of the loan amount, and other fees, like documentation fees. Consumer advocacy groups generally consider these kinds of loans predatory because they target desperate borrowers taken in by aggressive marketing and promises of quick, easy cash.
While taking on debt has always affected credit scores, under FICO's 10 T scoring model, introduced in 2020, people who take out personal loans could get an even lower score than under other scoring models. Under the 10 T model, consumers who transfer their credit card debt to a personal loan and then accumulate more credit card debt, in particular, will probably see their credit scores fall.
Some bank subsidiaries and consumer finance companies lend money in the form of consolidation loans. With a consolidation loan, you roll multiple older debts into a single new one that, ideally, has a lower interest rate than your existing debts. Then, your monthly payments are lower.
While lowering your monthly debt payment might sound good, consolidation loans have pros and cons.
If your credit score is pretty good, consolidating your debts might be a viable strategy for paying them off. But in most cases, the interest rate on this kind of loan will be high, often reaching 36% or more, depending on your credit score. Lenders also frequently charge fees or require you to buy insurance, bringing the effective interest rate closer to 50%. If you get a low promotional introductory rate, the rate will probably increase at some point.
And you’ll most likely have to make payments for longer than you would otherwise, which means you might pay more interest than if you’d stayed with the original creditor.
Also, getting this kind of loan doesn’t help you change the spending habits that got you into debt trouble in the first place.
Sometimes, a consolidation loan is a personal loan. Other times, the lender requires you to put up your house or car as security, which means the loan is like a second mortgage or a secured auto loan.
Consider carefully whether you want to convert unsecured debts, like credit card debt, into a consolidation loan secured by your home or vehicle. If you default on a secured consolidation loan, the finance company can foreclose on your property or repossess your car.
Car title loans, also known as "auto title loans" or "vehicle title loans," are high-cost, small-dollar, short-term loans that use your car or another vehicle, like a motorcycle, as collateral. These loans have few or no credit requirements, and many lenders won’t even check your credit history.
You can apply for a car title loan online or visit a lender’s store. The amount you’ll be able to borrow is based on your car’s worth, like 25% or 50% of the value. The loan cost is often listed in dollars per $100 borrowed.
Usually, you keep and drive the car; the lender retains the vehicle title as security for repayment of the loan and perhaps a copy of your keys.
You’ll normally have to own your car free and clear to get this kind of loan. So, if the vehicle is financed and another lender has a lien, you probably won’t qualify. You’ll also probably need to show the lender your car and provide the actual title, a photo ID, and proof of insurance.
You can usually still receive a car title loan if you have bad credit. Again, most lenders don’t require a credit check. The vehicle's value is the primary consideration for the lender when determining how much to lend.
Like with a payday loan, you’ll have to repay the loan, plus interest and maybe a fee, by a specific deadline, generally 15, 30, or 60 days later, or longer with some lenders. Most lenders allow you to pay in person, through the lender’s website, or by automatic withdrawal from your bank account. If you repay the loan, you get the car's title back.
A car title loan could cost you a lot of money, especially if you take out one loan after another. Or you might lose your vehicle to repossession. According to the Federal Trade Commission, monthly finance charges of 25% (300% annual interest) are standard.
If you can’t afford to pay the debt when it comes due, the lender might allow you to roll over the loan. In exchange for another 30 days to repay your title loan, you’ll pay more interest and fees. Like a payday loan, you pay more each time you roll the loan over.
Missing even one payment can mean losing your car. In 2016, the Consumer Financial Protection Bureau (CFPB) released a report showing that one out of every five borrowers who take out an auto title loan loses the car to repossession.
Some states have a law that makes vehicle title lending illegal.
Millions of patients sign up for medical credit cards, such as CareCredit, offered in the waiting rooms of physicians' and dentists' offices. These cards help people pay their medical bills.
But if you use a medical credit card to pay your medical bills, the Consumer Financial Protection Bureau says interest payments can increase those bills by hundreds or thousands of dollars.
Medical credit cards usually offer a promotional period when patients pay zero interest. But if you miss a payment or don't pay off the loan during the promotional period, you might end up with credit you can't afford.
The APR of the typical medical credit card is 26.99%, while the mean is around 16%. So, you might face an interest rate of up to about 27% or even higher in some cases.
Many medical credit cards offer "deferred interest" promotions. In this kind of promotion, the interest rate is zero or very low for a set amount of time, such as a year or longer. But when the promotional period expires, the rates jump significantly. And if you can't pay off the total amount before the end of the promotional period, you owe interest on the original amount charged, not just the remaining balance.
For example, say you pay $3,000 for a medical procedure using a medical credit card and make payments for six months with no interest. If you don't pay off the full balance at the end of the six-month promotional period, you then get charged interest at 26.99% on the original amount ($3,000).
If, instead, you had used a regular credit card with a 16% APR, for example, for the purchase, your monthly payment might have been a little higher each month, but the total amount you'd pay in interest would be much less.
The bottom line is that these options are pricey and risky ways to find money. If you're having financial troubles, you'll be better off if you find an alternative. For example, you might consider:
For more information on managing your debt, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo).
At a pawn shop, you leave your property and, in return, the pawnbroker typically lends you approximately 25% to 60% of the item’s resale value. The most commonly pawned items are jewelry, electronic and photography equipment, musical instruments, and firearms.
The average amount of a pawn shop loan is about $75–$100. You're given a short time to repay the loan, typically a few months, and are charged interest, often at a very high rate.
Here's why using a pawn shop is almost always a bad idea:
Although you borrow money for only a few months, paying an average of 10% a month interest means that you're paying an annual interest rate of 120%. Interest rates may vary from 12% to 240% or more, depending on whether state law restricts rates pawn shops can charge.
You might also be charged storage costs and insurance fees.
If you default on your loan to a pawn shop, the property you left at the shop to obtain the loan becomes the property of the pawnbroker. You're usually given some time, typically 30 to 60 days, to pay your debt and get your property back. If you don’t, the pawnbroker can sell it.
In about a dozen states, you're entitled to the surplus if the sale brings in money in excess of what you owe on the loan, storage fees, and sales costs. But don’t count on getting anything.
To learn about safer ways to get control of your finances, see Options If You Can't Pay Your Debts. Consider consulting with a debt-relief lawyer to get more information if you need help deciding which course of action is best.
And, if you have a lot of debts you can't pay, you might also want to consider filing for bankruptcy. In that situation, you'll want to talk to a bankruptcy lawyer.
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