Automatic loan payments can be a good way to stay on top of monthly bills. Taking a few steps to pre-set your payments to be automatically deducted from your bank account each month saves time, hassle, and money by preventing late fees. They’re also a helpful way to keep track of your monthly budget and expenses. Some lenders even provide discounted loan rates to encourage automated payments.
But despite the benefits, automatic payments come with a drawback — particularly regarding payday loans. What should you do if your payday lender required you to set up automatic debits from your account, and you don’t always have the money available to make the payments? It could be an expensive lesson.
How do automatic payments work?
When you agree to automatic payment systems, you authorize your bank to transfer a certain amount of money on a set date. Most of the time, these payments come from a credit card or a checking account.
If you enroll for an automatic payment service using your credit card, it will act as a recurring charge to your account. For instance, when you have monthly payments for your phone, cable, or Netflix, it is a great way to avoid late fees that incur additional costs. Most people prefer such automatic bill payment for the following reasons:
- It’s convenient because you don’t have to keep track of multiple due dates
- You don’t need to visit the bank or log on to the bank’s website when you want to pay
- There’s no risk of forgetting to make payments
The first option is online bill pay through your bank. You give the bank authorization to pay all creditors automatically from the account you choose. This is usually the best option since you don’t need to give out any account details, making it less risky. All you need is to set the amount to pay and the payment date.
If you’re using your checking account for payments, always set up an alert before the payment date to ensure you have enough funds to avoid any overdraft charges.
Another option is to use your credit card for automatic monthly payments. It can be a safer way to automate your recurring bills, especially any online transactions, because of the buyer protections credit card companies offer their customers.
How to stop lenders from debiting your bank account
ACH stands for Automated Clearing House, a U.S. financial network that’s used for electronic payments and money transfers. Thanks to technology, ACH payments are becoming fairly routine. In 2016, the ACH network processed more than 25 billion electronic payments totaling $43 trillion. But while convenient, these payments aren’t always ideal. For example, borrowers may find themselves in a position where they need to stop lenders from debiting their bank account. To do so requires carefully following a specific process.
How ACH payments are used by payday lenders
While many lenders encourage automatic payments or they’re used as a convenience by borrowers, they’re often a condition of payday loans.
Many payday lenders require borrowers to provide bank account information and authorize ACH loan payments during the application process. In addition, borrowers must fill out and sign an ACH authorization form that lists the amount, regular payment dates and start and end dates for the payments.
When the loan is approved, the payday lender uses the bank account information to deposit the borrowed cash directly. Once loan payments are due, the payday lender uses the bank account information, along with the signed permission from the borrower, to automatically debit the bank account to collect loan payments.
Risks of using automatic payments to repay payday loans
Payday loans rarely leave you in a better financial position. In fact, more than 90% of borrowers say they regret taking out their payday loan.
Repayment of payday loans via these automatic ACH payments can carry some significant risks for borrowers. If borrowers don’t have enough money in their bank accounts when a payment processes, it triggers overdraft fees and other charges. Or the bank may reject the payment due to insufficient funds, which can lead to late fees.
In fact, more than half of payday loan borrowers overdraw their accounts within a year, according to a study by Pew Charitable Trust. Furthermore, the study reported that 27% of those overdrafts directly resulted from automatic payday loan payments, and more than half of the overdrafts were accidental.
Another risk payday loan borrowers face is an unauthorized debit from their bank account using the information they provided to the payday lender. A third of payday loan borrowers reported that they’ve seen unexpected activity in their bank accounts directly related to their payday loan. In some cases, the payday lender deducted additional fees or payments from borrowers’ bank accounts without notice or permission. In other cases, the payday lenders sold borrowers’ private information that exposed their bank accounts to unauthorized payments or debits.
How to stop automatic payments
Under federal law, borrowers have the authority to stop automatic payments at any time, even if they already provided permission. However, to legally stop the payments, borrowers must follow these steps:
Provide notice to the payday lender that permission is being revoked
This should be done in writing. The Consumer Financial Protection Bureau (CFPB) offers a letter template borrowers can use to simplify the process. It’s also best to call the lender to let them know a written notice is being sent. Keep a copy of the letter for personal records.
Notify the bank or credit union
While the payday lender no longer has permission to withdraw from a bank account once authorization has been revoked, it’s best to inform the bank that the lender no longer has authorization to debit a checking account for the loan payments. Again, this can be done using the CFBP’s letter template. Call the bank to discuss the revoked authorization. Some banks or credit unions may require an online form.
Issue a stop-payment order
Immediately contact the bank or credit union to issue a stop-payment order for the next loan payment, especially if authorization was revoked close to the next withdrawal date. The bank should be contacted no less than three days before the next payment to stop payment. The bank will provide the steps necessary to officially stop payment. An initial call may be adequate, though the bank may require written notice, and the borrower may need to provide the bank with a copy of the letter to revoke authorization that was submitted to the payday lender.
Keep an eye on your bank account
Once the necessary steps have been taken, carefully monitor the bank account to ensure that the payday lender does not continue to debit payments from the account without authorization. If money is withdrawn, the borrower should be able to dispute the withdrawal with the bank and get the money – and any associated withdrawal fees – refunded.
What happens if you stop payments on your payday loan?
Revoking authorization to debit loan payments from a bank account doesn’t remove your obligation to repay the loan. If payment isn’t made another way, you’ll be on the hook for nonpayment fees. In addition, if you continue to ignore the loan payments, the lender may send the loan to a debt collector.
The lender or a third-party collection agency may bombard you with letters and phone calls demanding repayment. In addition, because payday loan applicants often have to provide personal references as part of their loan applications, loan collectors may begin contacting the listed references about the nonpayment of the loan.
A loan that goes to collections also appears on your credit report, negatively impacting the credit score for up to seven years, and the lender may file a lawsuit against you to try to force you to repay.
Is it legal to stop payments on your payday loan?
Some federal regulations limit the power of payday lenders to collect electronic payments from borrowers. For example, federal Consumer Financial Protection Bureau regulations say lenders must notify borrowers in writing before payment is automatically deducted from a bank account.
Regulations also limit lenders to two consecutive attempts to withdraw funds from an account; that way, if an account has insufficient funds, the lenders can’t trigger an accumulation of penalties for overdrawn accounts or missed payments. The borrower must also be notified in writing if the lender changes the date, amount, or part of the ACH authorization agreement before making an automatic debit.
Check your state’s laws. Several states outlaw or limit payday loans. New York state, which has outlawed payday loans, prohibits ACH payments from financial institutions within the state to payday lenders. Delaware requires lenders to wait five days before one failed automatic withdrawal attempt before making another. Payday loan sites provide comprehensive views of payday lending regulations by state, or borrowers can visit state consumer or financial protection websites to learn more about payday lending laws and collection of payment where they live.
What is the difference between autopay and bill pay?
It’s important to note that automatic ACH payments are different than electronic bill payments. Electronic payments go through the bank. They can be one-time payments, or they can be automatic, recurring payments. ACH payments are set up through the lender, giving them the authority to withdraw funds through a provided bank account. Because online bill pay is set up through a bank, these payments are often much easier to cancel, change and monitor.
Tips for dealing with ACH payday loan payments
In addition to knowing your rights – and understanding the payment process – for payday loans, there are other steps you can take to protect your finances from payday lenders.
If all else fails, close the associated bank account
After completing all of the necessary steps, if automatic payments continue to be a problem, it might be time to close the bank account tied to the payment. To close a bank account, borrowers should:
- Be ready to set up a new bank account, either with a different financial institution or with the same bank. A new account should be set up as soon as the old one is closed to avoid difficulties with paying other bills or accessing funds.
- Consider other recurring payments tied to the account. While the account may need to be closed because of problems with a payday lender, there may be other important payments – such as rent, utilities or mortgages – tied to the account that could result in complications or fees if they aren’t instantly transferred to a new account.
- Withdraw all funds from the old account. The money from the old bank account should be automatically transferred or instantly deposited into the borrower’s new bank account.
- Request written verification that the account has been closed to be sure that additional payments will not be withdrawn, triggering fees for insufficient funds.
Know where to go for help
Under federal law, payday lenders can’t withdraw funds from a bank account without the borrower’s permission, even if the borrower has authorized it in the past. Additionally, payday lenders cannot require borrowers to pay via automatic debit. If a lender is breaking the rules, file a complaint with the Consumer Financial Protection Bureau. Borrowers who face illegal debits or payment requirements from payday lenders should also check with their state consumer protection agencies or state attorney general’s office for assistance.
Take steps to repay your payday loan
Payday loans — sometimes referred to by lenders as cash advance loans — come with notoriously high interest rates. So if you’re having difficulty repaying a payday loan, or you’ve stopped automatic loan payments, do not ignore your loan payments altogether.
Because of the high annual interest rates — APRs can be as high as 600% — and fees, the costs of payday loans can pile up and create a cycle of debt that can take years for borrowers to escape. Ideally, borrowers would set up alternative payments after revoking ACH authorization.
If you can’t make payments, call the lender as soon as possible to try to work out an extended payment plan or lower payments. If a loan goes to a third-party debt collector, you might be able to negotiate a reduced repayment with that collector. Finally, consider working with a nonprofit credit counseling service to determine the best way to pay off or reduce the payday loan debt or explore options for a debt consolidation loan or a short-term loan to try to ease your financial crunch.
Managing payday loan payments
While most payday lenders require borrowers to authorize ACH payments, borrowers don’t have to use automatic debit payments to repay. Borrowers who do not wish to use ACH payments – or who are having difficulty managing their automatic payments – should revoke authorization for those payments and find alternative ways to repay their loans. Should lenders continue to insist upon or automatically debit these payments, reach out to federal or state consumer protection programs for support.
- Always use a financial calculator to know what you can afford. The calculator will factor in your budget and what you should expect to pay each month.
- Negotiate the interest rate, since it will help to determine your monthly payment. It helps to get a loan that is affordable and will save you money over time. The more flexible it is, the better.
- Always avoid loans with a long payoff term. Though they offer lower monthly installments, they cost more in the long run.
- If you revoked payment authorization and a lender still takes money from your account, contact the state attorney attorney general’s office or state regulator, and notify the CFPB.
The bottom line
Automatic payments can be an expensive lesson if the money isn’t in your account and the overdraft fees start to add up. At that point, it’s critical that you take a few steps to stop the automatic debits immediately. And if for some reason the payments don’t stop after that, you have some protections available.