This information is provided for educational purposes only and does not constitute legal advice.
Many American families struggle every month, working hard to make ends meet. Consumers who run short of money before payday probably cannot manage if they borrow from a payday loan store. High cost loans that must be repaid on the next payday to keep the check from bouncing usually don’t solve a financial crisis — they only make financial worries worse. Coping with pressing financial problems without adding more debt takes effort and may require creativity but can save you a lot of money, worry, and stress. Here are some tips that CFA offers:
Avoid Needing Quick Cash Payday Loans
- Build a $500 or more emergency fund. Although money may be tight, we all need an emergency savings nest egg for unexpected bills or ups and downs of income and expenses. Start by having a small goal, such as $10 per paycheck. If your check is directly deposited into your bank account, ask your employer to direct deposit a portion to a savings account. To learn how you can become a saver, visit www.AmericaSaves.org.
- Developing a household budget is a way to keep track of income and expenses and to determine ways to save. Take stock of your income and expenses. Work out a realistic spending and savings plan with your family. Set aside some money every payday for big bills that come due once or twice a year, such as insurance. Plan ahead for budget-busters, such as holiday gifts, birthdays and vacations.
Get Credit Counseling Help
When done well, credit counseling can be a useful tool for consumers in financial distress or to help families plan a budget. Traditionally, credit counseling agencies have offered a range of services, including financial and budget counseling and community education, as well as debt consolidation plans, known as debt management plans or DMPs. However, consumers should be aware that there have been serious problems in the credit counseling industry, including improper advice, deceptive practices and excessive fees.
- Credit counseling is not for everyone. Evaluate all of your options before entering credit counseling, including developing a better spending and savings plan, negotiating individually with creditors and – in serious situations – declaring bankruptcy.
- Shop around for a good credit counseling agency. Many agencies that advertise on television and the Internet are not credit counseling, but credit repair companies. These companies charge excessive fees for services that you can do yourself for free. Get referrals from friends or family. Check with the Better Business Bureau or state Attorney General’s office to find out which agencies have had complaints lodged against them. Look at several agencies closely before making a decision. A good place to begin your search for a reputable agency is the National Foundation for Credit Counseling.
- Military consumers can get help. If you are active duty or retired military, contact Military OneSource to find the installation nearest to you with a family service center or support center that can help with financial problems. Or access online here. Military relief societies may also be able to provide counseling. Navy and Marine personnel can contact the Navy Marine Corps Relief Society. Coast Guard personnel can contact Coast Guard Mutual Assistance.
Cope With a Cash-flow Gap Without Borrowing
- Before you are late on a rent, mortgage, or utility payment, speak with the creditor. For non-interest bills, such as utility or telephone bills, ask about making payment arrangements. Ask to delay payment until your paycheck arrives or set up a repayment schedule that stretches out payments. Make sure to ask about fees or extra costs for extended payments. Getting behind on paying for loans and bills may damage your credit score.
- Ask your employer for an advance on your next paycheck. This isn’t a loan and will reduce the amount of your next paycheck. Employers that make advances may limit how often you can do this.
- Delay expensive items until you have cash. If a car repair is causing the cash-flow problem, explore public transportation options until you have the funds together to repair your vehicle. See if any co-workers live nearby so that you can car-pool to work.
- Use some of your emergency savings instead of borrowing, but repay yourself.
- Apply for assistance programs, such as emergency utility funds. Take advantage of local charity, religious, or community programs that help families make ends meet in a crisis.
- Work overtime or pick up extra work to bring in more income. Sell something of value that you no longer need so that you get true value for the item.
- Consider adjusting the amount withheld for taxes to provide more money in your paycheck instead of over-withholding every payday to get a big tax refund later. Don’t under withhold either, since that can result in a big tax bill next April. If you qualify for the Earned Income Tax Credit, ask about getting the credit in each paycheck instead of one lump sum at tax time.
Find Less Expensive Money
- Ask your friends or family to lend you money. A written agreement to repay the loan can help avoid family strife later.
- Apply for a small loan or credit card at the bank or credit union where you have your account. Credit unions may not advertise these, but many of them make smaller loans to their members. Keep a credit card with borrowing capacity for an emergency. Try to only use it for emergencies and pay the balance off as soon as you’re able.
- Comparison shop for the least expensive credit you can get, before you sign a loan contract or commit to a debt. Compare both the finance charge in dollars and the annual interest rate (APR) percentage rate. All sources of credit except bank overdraft loans are required by federal law to quote credit costs the same way so you can compare costs.
- Consider less expensive sources of small loans.
- A signature loan company or licensed small loan company may charge 24 to 48% annual interest and permit installment payments over several months. If you borrow $500 at 36% annual interest and repay in monthly installments for four months, you will have paid $38.04. If you renewed a $500 payday loan every two weeks for the same four months, you will have paid $600 in fees if the fee is $15 per $100 for 8 loans.
- A credit card cash advance, although not cheap, costs a fraction of what using a payday loan does. A $500 cash advance repaid in four months costs $48.86 if the card has a 20.23% APR interest rate, no grace period, a 3% cash advance fee with a $7 minimum fee.
- A cash loan or a cash advance on a credit card from a federal credit union cannot exceed 18% annual interest. A $200 credit union loan repaid in three months costs $6.05.
- If you are in the military, contact the military charity or relief society for your branch of the service. You may be able to get free help for financial emergencies. Some military relief societies offer free small loans. For the Navy-Marine Corps Relief Society Quick Assist Loan, see http://www.nmcrs.org/pages/quick-assist-loan-qal Army Emergency Relief at https://www.aerhq.org/ The Air Force Aid Society offers a Falcon Loan, see http://www.afas.org/falcon-loan
- Apply for real overdraft protection at your bank or credit union. These plans transfer money from your savings, your credit card, or a line of credit to cover checks or debit card transactions that overdraw your account. While real overdraft protection costs a fee, it is less expensive than borrowing from a payday lender or paying a bounced check fee at your bank and at the retailer. Do not opt-in for “courtesy overdraft” programs that charge a bounced check fee to let you overdraw at the ATM or with debit card purchases. If you opted-in to pay debit card overdraft fees, you have the right to cancel “overdraft protection” at your bank.
- Avoid other sources of high-cost, high-risk credit, such as car title loans or car title pawn, or high-cost online loans
Get Out of the Payday Loan Debt Trap
- Avoid the payday loan debt trap. Taking out a second payday loan in order to pay the first one creates a larger debt trap. Do not roll-over a loan by paying just the finance charge or pay off a loan and immediately take out a new loan.
- Tell the lender that you need to work out arrangements to repay in installments. A few states require lenders to provide extended payment plans. If your lender refuses to work with you, contact your state regulator to ask for help. Click here to find your state to see if repayment plans are required.
- Stop lenders from taking money directly from your paycheck. Read your contract to see if you signed a voluntary wage assignment clause. If so, write a letter to the lender to revoke that agreement so the lender won’t be able to garnish your pay from your employer without court approval. Mandatory wage assignments as used in some payday loan contracts are prohibited by the Federal Trade Commission’s Credit Practices Rule.
- See Safeguard Your Bank Account below for information on stopping payment on checks or debits to stop the drain of repeat penalty fees while you work to repay the loan amount.
File a Complaint or Get Help
- File a complaint or ask for assistance from the agency that regulates lenders in your state. File complaints with the federal Consumer Financial Protection Bureau. Even if payday lending is legal in your state, lenders may not be complying with all the rules. Regulators may be able to help you work out a payment arrangement with licensed lenders. And, if you live in a state that doesn’t allow payday lending, the state regulator can take action against unlicensed lenders. Click here to find your state.
- Get legal help. Look for the local legal aid program. Click here for the Legal Services Corporation Program Directory. If you are in the military, contact the military legal office on base. Find a consumer attorney in your area who handles Financial Services cases.
- Report Lenders Who Fail to Disclose the Cost of Payday Loans
Lenders are required to quote the cost of loans as both the dollar finance charge and the annual percentage rate. Report violations of the Truth in Lending Act to the Consumer Financial Protection Bureau.
Tell Your Story to the CFPB
Have you had a bad experience with payday loans or car title loans? Get your voice heard and help keep these problems from happening to other consumers. Report your experience to the new Consumer Financial Protection Bureau (CFPB), a federal agency whose primary mission is to protect consumers of financial products, including payday loans and car title loans. Tell your story to help inform how the CFPB will work to protect consumers and create a fairer marketplace. Submit your story at https://help.consumerfinance.gov/app/tellyourstory.
Safeguard Your Bank Account
You need to protect your ability to have a checking account. Lenders base payday loans on checks/debits to secure loans, to make it easy to collect through the borrower’s bank account, and to encourage loan renewals to keep checks used to get loans from bouncing. Don’t write checks without money in the bank that day to cover the check.
Your banker can advise when it makes sense to close your account and open a new one to get control of loan payments and stop escalating Non-Sufficient Funds (NSF) fees generated by repeated attempts to collect on the check held by the payday lender.
Contact your banker quickly, before payday loans cause your account to be overdrawn. If your bank closes your account due to repeated overdrafts, you may be placed on a list that will make it hard to get a checking account for five years. Your bank or credit union can also help you stop payment to lenders that electronically access your bank account.
If the loan is not paid, lenders in some states can take action under civil “bad check” laws. In most states, however, lenders cannot file a criminal case for passing a bad check.
Beware of Bounced Check Fees on Payday Loans
Handing over a personal check or agreeing to electronic withdrawals from your bank account to get a payday loan has the potential to add unexpected extra costs when consumers don’t have enough money in the bank to repay the loan in full on the next payday.
- Payday lenders and banks both charge bounced check fees. Each time the check is returned unpaid by your bank, the bank charges you another fee. Bank fees range from $20 to $35 every time the check is returned for insufficient funds. The payday lender will charge an additional fee if the check is returned unpaid.
- Paper checks that bounce can be converted by the lender into an electronic re-presentment. Under industry self-regulatory rules that apply to all banks, any check that is sent back to the bank as an electronic transaction has a limit on the total number of times it can be presented for payment. There should not be more than three paper/electronic returned check attempts. That still means that your bank will charge you three bounced check fees for the payday loan check that overdraws your account, not counting the fees charged by the payday lender. If you see on your bank statement more than three total attempts to collect on the same check, file a complaint at your bank.
- Electronic payday loans can “bounce.” Online payday loan agreements may give the lender permission to break the payment into multiple attempts to take money out of your account. Each electronic collection attempt can trigger NSF fees. Some loan agreements attempt to bind the borrower to keep the bank account open until all fees have been collected.
What to Know About Stopping Payment on the Check
Stopping payment on the check used to get a loan does not cancel the contract to repay the loan. If you are thinking about asking your bank to stop payment on the check used to get a payday loan (something you might do to stop multiple NSF fees from adding up while you try to work out a repayment arrangement), here are some things to consider.
- Notify the bank before the due date for the loan if you want the bank not to pay the check when it is presented. You can tell your bank orally to stop payment but that only lasts for 14 calendar days. You must follow up with a written notice.
- Bank fees to stop payment on a check can exceed $30, similar to a bounced check fee. To stop payment, the bank needs to know the number of the check, the date it was written, the payee’s name, and the exact dollar amount.
- The stop payment order typically lasts only six months. At that point, the check can be represented to the bank and will go through or you will have to pay another stop payment fee. Carefully examine your bank statement for old checks that are processed and ask your bank to restore the funds and return the check as stale dated, if it is over six months old.
- Some state payday loan laws place borrowers at legal risk if they stop payment on the check used to get the loan or close the bank account or both, regardless of the reason.
For example, Alabama and Alaska laws allow payday lenders to take criminal action for failure to make good on the check used to secure the loan if the check was returned due to a closed bank account. Check terms of your state law at (link to state page with map)
Your Rights on Electronic Payment of Payday Loans
Consumers have the right under either federal law or industry rules to stop a payday lender from electronically taking money out of a bank account. This does not settle the debt but these rights help consumers stop the drain of repeated finance charges or bounced check fees while working out payment arrangements.
Loans with built-in renewals: if your online payday loan has built-in loan renewals, the lender cannot require you to pay electronically under the Electronic Fund Transfer Act (EFTA at 15 U.S.C. 1693a(9)). You have the right both to stop payment on a specific withdrawal and to revoke authorization for all future withdrawals by a lender. In both cases, the bank can impose its stop payment fee.
For a loan with built-in renewals, to stop an individual withdrawal, you must notify your bank orally or in writing at least three business days before the transfer is scheduled. The bank may ask you to also give them a written confirmation of the stop payment order within fourteen days of the oral notification. If you fail to provide the written confirmation, the stop payment expires at the end of fourteen days.
In addition, if you notify the bank that your debit authorization is no longer valid, the bank must block the next withdrawal as well as all future payments for the specific debit sent by the online lender.
To stop future electronic withdrawals, write a letter to the payday lender that it is no longer authorized to debit your account. Make a copy of your letter to give to your bank.
Your bank may ask you to confirm that you have notified your lender that you no longer authorize the payments to be automatically debited from your account. Write a letter to your bank to give written notification within 14 days of your oral notice to the bank. Otherwise the bank may honor subsequent debits to the account. Check your bank statements and report any unauthorized withdrawals from your account to your bank.
One-time payment loans: While federal law does not give consumers the right to stop payment on a one-time debit transaction, the lender has agreed to comply with rules issued by a private organization that provide this right.
The online payday lender is required by industry rules to disclose that the consumer may revoke authorization to debit a bank account. Notify your lender and your bank at least three days before the withdrawal is to take place (the due date on the loan.) The lender must tell you how to revoke authorization. Read the fine print of the loan agreement for instructions on where and how to stop electronic access to your account.
Industry rules require you to contact the lender that you are revoking your authorization and to then notify your bank. Contacting the online lender may be hard to do if you don’t have a copy of the loan documents or if you borrowed from a lender that fails to post contact information. Internet payday loan contracts typically require you to give three days’ advance notice before the payment is due if you want to revoke electronic authorization.
Rights vs. Reality: While you have the right to revoke authorization for the online payday lender to electronically withdraw money from your bank account to repay a loan, it is not always easy to exercise that right successfully. Some banks’ stop payment systems are set up only to identify a check number and a specific dollar amount, not the name of the payee. Some Internet payday loan contracts state that loans may be broken into several withdrawals, so a bank may not be able to identify the transaction to be stopped. If you have other preauthorized debits for the same amount, the bank may mistakenly block a debit you intended to make.
To learn more about your right to stop electronic withdrawals from your bank account, see CFPB at http://www.consumerfinance.gov/askcfpb/1605/how-can-i-stop-payday-lender-electronically-taking-money-out-my-bank-or-credit-union-account.html.
Advice for Consumers Contacted by Debt Collectors
Consumers have legal rights when contacted by a collection agency. Everyone should try to pay debts legitimately owed but sometimes consumers may be unable to do so due to job loss, unexpected medical bills, or divorce. Sometimes, fraudulent collectors even try to intimidate consumers into paying “phantom” debt that doesn’t exist or is not overdue. They may have obtained information from online loan applications that were never approved, that was purchased for fraudulent purposes, or that was stolen. The Fair Debt Collection Practices Act is a federal law that applies to collectors and attorneys. It does not forgive lawful debts but protects consumers from harassment, abuse, and misleading and unfair practices. It is important that consumers know their rights and use them to avoid becoming victims of debt collection scams. Consumers should refer to these tips for help.