You took out a payday loan, and now you feel like your hand is caught in an alligator’s mouth about to do the death roll and rip your arm off. That’s what a payday loan debt trap feels like precisely.
If you’re looking for an escape, there are a few (legal) ways to stop paying your payday loans.
Stop payday loan lenders from debiting your bank account
If you’re one of the 12 million Americans who’ve used a payday loan in the past year, you probably know that most payday lenders require you to set up an ACH payment or automated clearing house payment, direct payment to them.
An ACH payment is a type of electronic bank-to-bank payment. The ACH system is a way to transfer money between bank accounts. ACH stands for Automated Clearing House, a U.S. financial network used for electronic payments and money transfers. In 2016, the ACH network processed more than 25 billion electronic payments totaling $43 trillion. But while convenient, these payments aren’t always ideal, especially when it comes to automatic withdrawals to payday lenders.
If you’re in a position where you need to stop lenders from debiting your bank account, there are steps you need to take.
Automatic payments are simple to set up but more complicated to untangle. To stop the lender from automatically debiting your account, you will want to notify both your bank and the payday lender that you will revoke their permission. Do all this in writing, make a quick courtesy call, and save a copy of the letter to both parties. Send the notice by certified mail. This revocation letter should be at the bank no later than three days before the payment date.
Last but not least, monitor your bank account for movement and dispute any charges you didn’t authorize.
How to legally stop automatic payments
Under federal law, borrowers have the authority to stop automatic payments at any time, even if they have already provided permission. However, to legally stop the payments, borrowers must follow these steps:
Notify the payday lender that consent is being revoked
Your bank and the lender need to be notified in writing and sent via certified mail.
The Consumer Financial Protection Bureau (CFPB) offers a stop automatic payment letter template that borrowers can simplify the process. Call lender to notify them, keep copies of written and verbal communications for your records.
Notify the bank or credit union
Tell your bank that the lender no longer has the authorization to debit your checking account for the loan payments. Use the CFPB template to help you craft a letter covering all the salient points.
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 following loan payment, especially if automatic payment revoked authorization close to the next withdrawal date. The bank will provide the steps necessary to stop payment officially. An initial call may be adequate, though the bank may require written notice. You will want to ensure all paperwork is with your bank and lender three days before your payment is due.
If you’re having a problem stopping a lender from taking money out of your account, you may want to contact your state regulator or state attorney general. You can also submit a complaint to the CFPB online or by calling (855) 411-2372.
Monitor your bank account
Observe your bank account to ensure that the payday lender does not continue to debit payments from the account without authorization. If money is withdrawn, dispute the withdrawal and get the money – and any associated withdrawal fees – refunded.
You should close your bank account to stop the transfers only as a last resort.
How payday lenders use ACH payments
They’re often a condition of payday loans. They are highly aware of the benefits of ACH payments and take advantage of an ACH withdrawal because it is easy for funds to be electronically pulled directly from a savings or checking account to make a bill payment.
Payday lenders require borrowers to provide bank account information and authorize ACH loan payments during the application process. Borrowers must also 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 and then debits the payment straight from that account.
Risks of using automatic payments
Payday loans rarely leave you in a better financial position. More than 90% of borrowers regret taking out their payday loans.
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.
According to a study by Pew Charitable Trust, more than half of payday loan borrowers overdraw their accounts within a year. Furthermore, the study reported that 27% of those overdrafts directly resulted from automatic payday loan payments. And because most borrowers cannot pay, the CFPB estimates that 80% of payday loans get rolled over, and 20% end up in default, which goes on your credit report for seven years and eliminates you from getting loans.
Another risk is an unauthorized debit from your bank account. A third of payday loan borrowers reported that they’d seen spontaneous activity in their bank accounts directly related to their payday loan. Sometimes it’s additional fees or payments without notice; sometimes, it’s because payday lenders sold your private information and exposed your bank account to unauthorized activity. If you do a payday loan with an in-house lender, you will be able to circumvent this additional unwanted side effect with dealing with payday lenders.
Will stopping ACH payments on my payday loan hurt my credit score?
No, because payday lenders don’t usually check your credit report or report to the three major credit bureaus — Experian, Equifax, Transunion. But if you stop making payments, the lender will send your debt to a collections agency, which will affect your credit score.
The debt collector will also hound you with phone calls and send you direct messages on your social media accounts. You must know your rights before you try this. The Federal Trade Commission’s Fair Debt Collection Practices Act will explain your rights as a borrower. Contact your state attorney general’s office if you think your rights have been violated.
Set up a payday loan extended payment plan
An extended payment plan (EPP) allows borrowers to set up a repayment plan for their loan over an extended period. The EPP provides payday borrowers with more time to repay the loan without incurring extra fees. Instead of paying the total amount of the loan on their next payday, a borrower can choose to pay back their loan in installments. Future payments will usually be due once a week, over four weeks.
An EPP is better to avoid the payday loan debt trap than a loan rollover. In a rollover, borrowers will pay the fees and interest and owe the entire loan principal amount. Setting up an extended payment plan can be a better option than rolling over your loan into a new one because you’ll make payments toward your loan principal.
How extended payment plans work
Payday lenders won’t usually offer an extended payment plan. To qualify for the program, a borrower needs to request it. According to InFiN, a Financial Services Alliance, borrowers have until the end of the business day the day before their loan is due to make the request.
To do so, a borrower must either visit the lender in person or contact it online, depending on the method they used to get the loan in the first place. When they request an EPP, you’ll have to sign a new loan agreement that breaks the payment schedule into four parts.
What’s a payday loan, and why are they bad?
A payday loan is a short-term, high-interest, low-limit loan, typically $500, that helps cover immediate cash needs until your next paycheck. Because of its predatory nature, it is outlawed in some states, and repayment is difficult for many borrowers.
Payday loans keep the borrower in a cycle of debt known as a debt trap. According to a DebtHammer survey, more than 90% of payday loan borrowers regret their loan. Many state laws outlaw them or cap annual percentage rates. Available through storefronts and online lenders.
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.
Payday Alternative Loan
Credit union Payday Alternative Loans often come with low rates and fees, which results in a lower overall cost of borrowing. It can be easier to get approval for a loan through a credit union than a traditional bank as an additional benefit. You would have to sign up for a membership, open up an account and make a small deposit, sometimes with as little as $5. Then you can apply for a loan.
The longer timeline to pay it off means you will have less chance to take out another loan to repay the original loan.
Keep in mind that some credit unions can have up to a six-month mandatory membership requirement before you can apply for a loan.
Cash advance app
A cash advance app allows borrowers paycheck advances, sometimes up to two days earlier with direct deposit, or gives access to monies already earned before payday. These online lenders offer small cash advances with no interest: some charge a small monthly membership fee, and some work based on tips.
Other debt relief options
If payday loans are only part of your debt problems, and you are also struggling with credit card debt — debt consolidation or debt settlement might be a better option. Here are a few options to consider:
A personal loan is also known as a consumer or multipurpose loan. This loan is unsecured credit provided by a financial institution and a type of installment debt that allows lump-sum funding repaid over time. Personal loans have lower monthly payments, longer terms, and far lower interest rates than payday loans.
Debt consolidation loan
A debt consolidation loan is a personal loan you can use to pay off high-interest debt, typically credit cards. Consolidating debt allows you to use just one loan to pay off one or more credit card balances, which can simplify your repayment plan.
Not all debt consolidation is good. It’s a bad idea if it does not save you any money. Bad consolidation happens when the interest rate on your new loan or line of credit ends up being higher than that of your existing debt, which mostly defeats the purpose of consolidation. The only benefit would be having all your debts in one place.
Credit card balance transfer
If you struggle with credit card debt, some credit card companies give you 0% interest for a specific amount of time, even up to 21 months. Such a card could save you plenty on interest, giving you an edge when paying off your balances. Credit cards typically allow up to 75%-80% of your card limit for balance transfers.
The catch 22 is you need to have good enough credit to qualify for a card with a 0% introductory APR on balance transfers.
Peer-to-peer lending websites match borrowers directly to lenders or investors without any financial institution involvement. You would state how you would spend the money and why lending you the money is a reasonable risk.
The online site charges a fee to connect investors with ready customers, and many are seeking unsecured personal loans.
Credit counseling through a nonprofit can help individuals get out of debt. They can help you through settlement, management, education, budgeting, and various tools to reduce and ultimately eliminate debt. Credit counseling agencies can also advocate on your behalf to negotiate with creditors to resolve debt beyond a debtor’s ability to pay. Some nonprofit agencies charge minimal fees, while others can be for-profit and include high costs.
Debt settlement is when your debt is settled for less than what you currently owe, with the promise that you’ll pay the amount agreed for in full. Sometimes known as debt relief or debt adjustment, debt settlement is usually handled by a third-party company. Still, you could also try to do this yourself if you are a crafty negotiator.
The bottom line
While dealing with payday lenders is no fun, there are steps you can take to halt their predatory behavior against you. And viable alternatives for you to explore before even considering taking out a payday loan.
No. Notify your state attorney general’s office if they try to intimidate you with threats of jail or arrest. Threatening you is illegal. Although if you receive a summons in court and decide to ignore the request, then the judge can order you to jail, this is a separate issue from your debt itself.
Unfortunately, payday loans are not eligible for loan forgiveness or federal forbearance due to coronavirus-related financial hardship.
A finance charge is one of the costs of borrowing money on credit. It’s a cost an individual incurs by lending money. Finance charges include interest on balances and any extra fees that the credit card company can legally collect. Any amount that a borrower needs to pay and pay back the actual cash borrowed qualifies as a finance charge. Finance charges on payday loans can be particularly high. That’s one of the reasons payday loans are outlawed in several states.