A payday loan is a short-term loan, generally lasting between several days and a month, in which the borrower is charged an exceptionally high rate of interest. If a borrower defaults on a payday loan, the lender is legally allowed to try to collect the money owed him. He can do this through a number of different means. However, he can only pursue collection before the expiration of the statute of limitations on a loan.
The statute of limitations on a payday loan will vary depending on the state in which the payday loan was issued. Each state has its own statute of limitations for different types of loans. For example, in Montana, a debt derived from a written contract -- from which virtually all payday loans are derived -- can only be pursued for 8 years, while in Missouri the debt can be pursued for up to 10 years.
As of December 2010, no state has a law regarding the statute of limitations for payday loans specifically. However, most states have laws that outline the statute of limitations for debts derived from written contracts. However, in some states, a payday loan may be classified as a different kind of contract. For example, in Ohio, the statute of limitations for written contracts is 15 years, while the statute for notes payable at a definite time -- which would correctly define a payday loan -- is only 6 years.
The exact time that the time period for the statute of limitations begins and ends depends mainly on how the law is written in a particular state. According to the law offices of Carreon and Associates, most statutes of limitations begin when the loan goes delinquent. However, in some cases, the time period can be extended. For example, in South Carolina, a partial payment automatically extends the statute of limitations, causing it to start over again.
After a statute of limitations has expired, a creditor can no longer take any actions to collect on the debt. While a creditor can technically sue a debtor after the statute has expired, a judge would be forced to throw out the case. However, a record of the unpaid debt will remain on a person's credit report for up to seven years, regardless of whether the statute of limitations has expired.