Payday loans can rapidly turn into an endless cycle of debt.
Many people are attracted to the offer by payday loan lenders for access to some quick cash before their next paycheck, but payday loan lenders usually aren’t upfront about the real costs of their service. Payday loan providers offer immediate, small short-term loan with your paycheck as collateral.
They don’t require good credit, or any credit at all, and it can initially sound like a good deal to those who are presently strapped for cash, especially around the Christmas season.
Paying a $15-$30 fee to borrow $100 for 8 days sounds like a 15%-30% borrowing rate, but if you calculate the APR for this type of transaction, it totals between 400 – 800%.
This is a trick payday loan lenders use to make their customers feel as if they are getting approximately the same rates as using a credit card.
Consumers often find that when they start borrowing money at such high rates, it is difficult to pay off the loan in the short amount of time required, usually a few days to a few weeks. Payday lenders often set up automatic loan renewal to cover for when the initial loan cannot be repaid, which results in a spiral of debt for the consumer.
When the spiral starts to get out of control, payday loan lenders will take measures such as electronically accessing your checking account and harassing you with threatening collection calls.
Payday Loan Debt Can Result in Large Fees
- 400% and larger APR.
- If you miss a payment, you will be charged penalty fees on top of the loan and interest amount.
- Bounced checks will result in fees from both payday loan lenders and your bank. Bank fees can be around $35, and payday lenders fees for bounced checks can be even higher.
- Payday lenders often used the information from your paper check to send multiple electronic attempts to gain the funds from your account, resulting in repetitive fees from both the bank and the lender if there are insufficient funds in the account. Sometimes they will even divide a single payment into several different electronic requests from your bank account.
- Many payday loans will include in their agreement automatic loan renewal, and will continue to grant you and attempt to collect on short-term loans with interest rates up to 800%.
How to Get Out From Beneath the Payday Loan Trap:
Contact the lender
At the first sign that total repayment of a payday loan cannot be achieved, the payday loan lender should be contacted for a payment plan negotiation.
It is advisable to read over the contract to see to see if there is a wage assignment clause which would allow the lender to garnish your paycheck.
If this clause is included, then you need to write a letter stating that the agreement is revoked.
This type of wage assignment is prohibited by the Federal Trade Commission’s Credit Practices Rule.
Protect your bank account
If you are unable to work out a sensible payment plan with the payday loan company, you must make steps to protect your back account by contacting your bank and asking them to stop payments to the lender.
You will be charged a stop check fee by your bank, but this is a necessary step to prevent the lender from racking up bounced check and non sufficient funds (NFS) fees as they repeatedly try to assess your account. It’s important to remember that you must contact your bank in writing about your stop check request because oral requests are only honored for 14 days.
Consolidate your debt
While you are protecting your bank account, you still need to deal with settling your debt. The best option is to consolidate your debt using a credit card or a personal loan. Even high APR credit cards have rates around 25%, which is much lower than the triple, and sometimes quadruple, interest rates of a payday loan.
If there are alternative methods of credit available, use them to immediately break the payday loan cycle. Even when the debt is settled, some payday loan lenders will continue to renew the loan so contact the lender orally and in writing, stating that you do not wish to continue loan renewal.
Find an advocate
If you do not have access to alternative lines of credit, or other means of procuring funds, and the lender will not work with you, it is time to find an advocate who will work with you. Payday lending laws are very strict in eleven states, and many times the practices of lenders do not comply with all payday lending rules.
Contact the agency that regulates lenders in your state to help determine if your lender has been operating within the full extent of the law. It is also advisable to hire a consumer attorney to help you work out a negotiation.
Your attorney can also determine if your lender has been complying with all lending rules in your particular state, and can help you if you have been receiving threatening collection calls or letters.
How to get debt collectors to stop calling
It is a little known fact that you as a debtor have a right to stop debt collectors from calling you, or even writing you, under the Fair Debt Collection Practices Act (FDCPA).
To stop debt collectors from calling you, you must tell them that you prefer to communicate in writing, which is beneficial because you will have documentation of everything they say to you. As a debtor, you also have the right to request an end to all communication by sending a cease and desist letter through certified mail.
This letter must state that you no longer want to communicate with the debt collectors, and they are permitted to send you one more letter before they cease communication completely. If they try to contact you more than once after the final letter, and you have proof that you sent the cease and desist letter, it is now within your right as part of the FDCPA to take legal action against the debt collection agency.
This isn’t a magic bullet, however, because you still have the debt to settle with the payday loan company. Payday loan companies can sometimes engage in debt collecting for themselves, including harassing phone calls.
If you are receiving phone calls and messages involving threats, try to record as many as possible to seek punitive action against the payday loan firm, if it is engaging in illegal activities.