Laws Against Payday Loan Collection

By Leigh Kelley

  • Overview

    Payday loans are short-term loans that usually have extremely high interest rates, some higher than 700 percent. Low-income workers, people on a fixed income and senior citizens are all targets of payday loan companies. These loans are meant to be used in emergency situations that occur between paydays. Generally, payday loan companies loan an amount greater than the amount the customer can logically pay on his next pay date. As a result, interest payments and fees add up until the customer is in an endless cycle of payments. A customer who borrowed $300 can end up repaying as much as $2,100 in a matter of months. Once the customer is stuck in this cycle, he may find that he can't make a payment. When this happens, payday loan companies may employ collection practices that would make a loan shark cringe. Stopping these collection attempts isn't easy, but it is possible.
  • Phone Calls

    Payday loan companies will usually contact people who owe them money by calling them at home, on a cell phone or at work. When you apply for a payday loan, you are usually required to provide your work number so the company can verify employment. If you don't pay back the loan as stipulated in your repayment schedule, the company will usually begin calling you at work. This poses two problems: You can lose your job for getting personal calls, and your work suffers as a result of the harassment. The Fair Credit Reporting Act stipulates that no debt collectors can contact you by phone if you advise them in writing to cease those efforts. To do this, you have to write a letter to the company and mail it with delivery confirmation so you have proof it was delivered. If the company calls you after that, you can file a complaint with the Federal Trade Commission.
  • State Regulations

    Many states have laws that prohibit or limit the amount of collection activities by payday loan companies. Arkansas has the harshest laws when it comes to payday loan collections. One provision states that the attorney general in Arkansas demands all payday loan companies stop collections and void all payday loan contracts. Because of these laws, many payday loan companies operate under the premise of offering short-term loans or check cashing services.


  • Military Loans

    Because so many loan companies were preying on military members and families, the federal government now requires that any company offering loans to members of the military be federally licensed. In order to get this license, the company must ensure complete compliance with all federal and state laws for collection practices. This includes the state laws for the state where the company is based, where the serviceman was stationed when he secured the loan and his current duty station, as well as his state of residence. While this makes getting a loan much harder for service members, it does help to protect them from the endless interest that would be added to the loan in the event of a sudden deployment or any other reason.
  • Online Loans

    Many online payday loans have built-in renewal terms. According to the section EFTA at 15 U.S.C. 1693a9, a lender cannot require you pay the loan electronically. You are allowed to stop payment on any transactions from that lender, and you can close your bank account without any legal recourse possible from the lender. However, you will still be responsible for paying your bank's stop payment fees, and the payday loan company can turn over the account to a collection agency or report the non-payment to a collection agency or credit referral service, such as Teletrack.
  • Prevention/Solution

    While some people find that emergency situations warrant taking out a payday loan, the only way to prevent the unorthodox collection practices of these companies is to avoid taking out such a loan. Saving cash in an emergency fund, applying for overdraft protection with your bank, borrowing money from family and friends or finding a second job are all ways to avoid having to take out a payday loan. If you find that you must take out a payday loan, carefully consider the amount you will be able to pay on your next payday. These loan companies make the bulk of their money through the high interest rates and roll-over fees from customers who can't pay off their full loan on the first check after the loan was made.
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