Taking a payday loan can be a tempting option when you find yourself in need of quick cash. There's typically no credit check and you can have money in your hands in a matter of hours. You simply hand over a post-dated check for the amount of the loan plus fees and interest, or authorize a debit from your bank account on the date of your next payday. But if you need your next paycheck to take care of other, must-pay bills, a payday loan can turn into financial quicksand because the interest rates and fees are often exorbitant.
Closing Your Account
You can close your bank account before the debit hits or the payday lender presents your post-dated check for payment, but this doesn't relieve you of legal responsibility for repaying the loan. You might even find yourself deeper in debt because you may still be responsible for overdraft fees when the lender tries to complete the transaction. If you take your money out of the bank and don't immediately redeposit it, opening a new account with another bank before the payday loan payment hits, you might not be able to open another account. A negative banking history follows you, so if you leave an overdrawn account behind at one financial institution, another bank might not be willing to open a new account for you.
Blocking the Transaction
The Consumer Financial Protection Bureau suggests blocking the transaction from the payday lender rather than closing your bank account entirely. If you notify your bank at least three days before the debit or check is scheduled to hit, ideally in writing, the bank is legally obligated to decline the transaction. If the loan is scheduled to be repaid in multiple transactions, you can stop payment on all of them. The bank will probably charge you a fee, but it's often less than an overdraft charge, and this won't leave you with a bad banking record. Notify the payday lender that you're blocking the transaction as well.
Liability for the Loan
If you default on payment of the loan, the payday lender will take action to collect the money you owe. It can report your delinquent debt to credit reporting agencies and turn the account over to a collection agency. This can mean months or even years of aggravation, unless your financial problems are severe enough that you plan to file for bankruptcy protection. Another option might be to ask your payday lender to roll the loan over into a new one if you can't pay on the scheduled date. Interest and fees will continue to pile up until you can pay everything off, but your credit score will remain intact.
Check State Law
Payday lenders aren't legal in all states, so check with legal aid in your area to learn the rules in your jurisdiction. If your state outlaws these loans, the lender — or a collection agency — won't be able to sue you for the amount of the loan if you don't pay. This can get tricky if you signed up for the debt on the Internet rather than at a brick-and-mortar store located in your state. Some online lenders take the position that they're not bound by state laws, but with legal help, you may still be able to fight their claim for repayment, or at least for any extra interest and fees incurred by defaulting.
- North Carolina Department of Justice: Payday Loans
- Robert Weed: How to Tell Your Bank to Stop Payday Loan Automatic Withdrawals
- Consumer Financial Protection Bureau: How Can I Stop a Payday Lender From Electronically Taking Money Out of My Bank or Credit Union Account?
- Washington Law Help: Payday Loans -- What to Do If You Get Caught in the Debt Trap