If your payday loan lender requires you to set up automatic payments when you apply for your payday loan, it can cause problems if the money isn’t there to repay the loan when your next paycheck rolls around.
Don’t worry, there are ways to stop these automatic payments legally.
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How to stop paying payday loans — legally
Let’s start with the basics. When you apply for a payday loan, your payday lender may require you to authorize ACH transfers from your bank account.
Pro tip: 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 have become fairly routine. In 2016, the ACH network processed over 25 billion electronic payments totaling $43 trillion.
This is not always ideal. For example, if the money isn’t in your bank account when the payday lender tries to withdraw the money to repay your loan, it could cause your account to overdraft. If that happens, they may try to withdraw incrementally smaller amounts, triggering several expensive overdraft fees over the course of an hour or two.
Luckily, there are ways to stop these payments.
Get a lower payment with DebtHammer.
We help borrowers escape the payday loan trap.
Pro tip: Sometimes, the lender will require a postdated check instead.
READ MORE: If you’re looking for more general tips on how to get out of payday loan debt, click here
4 easy steps 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:
1. Notify your 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.
2. Notify your 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While the payday lender no longer has permission to withdraw from a bank account once authorization has been revoked, it’s best to inform the bank that the lender no longer has the authorization to debit a checking account for the loan payments. Again, this can be done using the CFPB’s letter template. Call the bank to discuss the revoked authorization. Some banks or credit unions may require submitting an online form.
3. 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 stop the payments officially. An initial call may be adequate, though the bank may require written notice. The borrower may need to provide the bank with a copy of the letter to revoke the authorization submitted to the payday lender.
Pro tip: The stop-payment order will only work if the lender has not already started the withdrawal process. Also, most banks charge a fee for this service, usually around $30.
4. Monitor your bank account
Once you’ve completed the first three steps, carefully monitor the bank account to ensure that money is not debited from your 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.
If the first 4 steps fail, close the 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 with a different financial institution or 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.
READ MORE: What happens if you close your bank account and default on a payday loan?
How payday lenders use ACH payments
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.
The payday lender will say they need your bank information so that you can get your loan money faster. This is usually true. However, they primarily use ACH payments to “secure” an unsecured loan, attempting to use the contents of your bank account as collateral.
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. The problem is that 80% of payday loan borrowers can’t afford to repay their loan on the due date.
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.
Stuck in payday debt?
DebtHammer may be able to help.
Be on the lookout for unexpected activity
Another risk payday loan borrowers face is unauthorized debits from your bank account. A third of borrowers reported that they’d seen unexpected activity in their bank accounts directly related to their payday loan. Sometimes, payday lenders deduct additional fees or payments from borrowers’ bank accounts without notice or permission. In other cases, payday lenders sell borrowers’ private information, exposing their bank accounts to unauthorized payments or debits.
How to get help
Under federal law, payday lenders can’t withdraw funds from a bank account without the borrower’s permission, even if the borrower has previously authorized it. Additionally, payday lenders cannot require borrowers to pay via automatic debit. If a lender breaks 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 the state attorney general’s office for assistance.
You’re still obligated to repay the loan
Revoking authorization for automatic loan payments doesn’t remove your obligation to repay the loan. You’ll be on the hook for nonpayment fees if payment isn’t made another way. In addition, if you ignore the loan payments, the lender may send the loan to a debt collector, who may aggressively attempt to collect the money. If your rights are violated, you could take legal action against your payday loan lender and may not have to repay your loan at all.
READ MORE: Fair Debt Collection Practices Act
Other payday loan alternatives
The best way to get out of payday loan debt is to avoid payday loans altogether. These options are similar to payday loans but better.
- Debt consolidation loans
- Credit card balance transfers
- Peer-to-peer lending
- Credit counseling
- Debt settlement
READ MORE: Is debt settlement a good idea?
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.
