Payday loans from the legal perspective
For a lot of people, a payday loan is an easy escape from complicated financial situations. In case you are in urgent need of money, you just apply for a loan to cover the bills. However, it is not always that simple. Payday loans have certain legal implications. To better understand some of the problems that may arise from taking out legal payday loans, you may need to understand it from a legal perspective.
- The average payback period is 14 days.
- The average loan size is $370.
- The average fee is $25 per week.
- The borrower can pay by a post-dated check for next payday period.
- Most borrowers give the lenders electronic authorization to withdraw the money directly from their bank account.
- If there is no money in the bank account or the check doesn’t encash, further fees are imposed.
- Almost 6% of American adults have used legal payday loans.
- The average borrower has the loan for approximately 5 months.
More than 70% of the borrowers take out more than 2 payday loans a year.
Are there legal payday loans?
Yes, they are legal. Payday loans were created to help people cope with some financial difficulties or unexpected emergencies that lead to additional bills. However, there is currently no correct answer to this question. It depends on which state do you live in. The state regulations on legal payday loans vary from State to State. For example, New York has forbidden them altogether. That means that any form of legal payday loans is illegal there. The situation is more or less similar in North Carolina. Of course, there are various approaches to the regulation. Other States try to regulate how high the interest rate can go. In Arizona, it is forbidden for payday lenders to offer interest rates that are higher than 36% while the maximum allowed interest rate is 24% in the District of Columbia.
Online payday loans raise a separate legal problem. Since you can apply and receive an online payday loan from virtually anywhere, what happens when you apply from a State that has certain regulations on the matter. Do the regulations apply? The answer is yes. That means, there is higher chance that your loan is not legal with online payday loans. There is only one way to avoid that – check online for your State regulations. Almost every State Attorney General web page has detailed information on the matter. That is one of the most credible sources you can use. In addition, if you have any doubt, you can always call the authorities and make an inquiry.
In which States are payday loans prohibited?
According to the latest data, payday loans are prohibited in the following States: Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. In Hawaii, Kentucky and Utah, on the other hand, payday loans are only legal when it comes to check cashiers. Don’t take payday loans or online payday loans in one in those States. It most cases, it won’t even be possible as online lenders have to confirm your State of residency. Look into other options such as credit cards or lending from a bank or other forms of loans.
What is debt rollover ? Are they legal?
One of the main traps a payday loan can lead you to is a payday loan debt cycle. It occurs when you take out another payday loan to repay the first one and that keeps on repeating. The other option is to get your payday loan renewed for another payday loan period. You may need to resort to that because of the payday loan’s short-term nature. It normally has to be repaid in two weeks and naturally that is not always possible. In some cases, your creditor can automatically renew your debt if he has authorization to take certain amounts of money directly from your bank account. That renewing of course comes with a small fee. It is also known as a debt rollover. It can be dangerous because during the time of your new payday period, the interest rate keeps adding to the amount you owe. That is why in some States, debt rollovers are prohibited.
Debt rollovers are not legal in Arizona, Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. In the other States they are limited to a certain amount. For example, in Alabama, Colorado, North Dakota, Rhode Island and Wisconsin, your payday loan can be legally renewed only once. The maximum number of times for renewal is 6. However, there is an additional restriction there – the lender must reduce the principal amount of the loan every time there is a renewal by as much as 5 %. Other States that allow many renewals are Delaware and North Dakota, where up to 4 renewals are permitted.
How are payday loans regulated?
Payday loans are regulated on the federal and State levels.
At the National Conference of State legislators, you can find the latest bills adopted in each State as well as their summaries. Those include whether a license is needed for establishing a payday loan business, caps on fees and interest, the maximum number of loans per person and others. You should keep in mind that there is one principle act in each State and it could be changed periodically. It is important that you have checked the latest developments for your home State.
Payday loans are short-term loans for small amounts of money. Therefore, some States have even regulated the maximum amount of money that could be lent as a payday loan. Those amount are regulated either by fixed numbers which vary from $300 up to $1000 or they are pegged to the gross income of the borrower. For example, in New Mexico, it is forbidden for licensees to give a consumer a loan if his debt exceeds 25 % of his gross income.
Apart from the regulation on the number of rollovers, there is also a regulation regarding the maximum loan term. Again, there are different approaches. For example, in Alabama, there is a 10-day minimum period combined with a 31-day maximum period, while in California, there is only a maximum period regulation of 31 days. In Delaware, that is doubled – up to 60 days.
On federal level, the Federal Trade Commission is the regulatory authority. Its main objective is to protect consumers against payday loan scams. From a legislative point of view, the Federal Trade Commission Act, the Truth in Lending Act, the Credit Practices Rule’s, the Electronic Fund Transfer Act are very important. The Fair Debt Collection Practices acts is one of the most important which you should know as a consumer. It is the federal regulation that applies to debt collectors and it stipulates that they cannot resort to harassment and abuse. Moreover, they are prohibited from using unfair practices and misleading misinterpretations to confuse and scare you. Don’t let yourself be bullied and if you have any doubts, check your rights with the authorities. Don’t pay until you are sure what the consequences are. They will be different depending on your circumstances. Plus, the Commission deals with the so-called phantom loans. That means if you think you are victim of them, you can contact the Commission, report to them and get some help.
What are phantom loans and how to deal with them?
Phantom debt or zombie debt are outdated old debts that are no longer owed. There are certain legal provisions that if a debt is older than 2 or 3 years, it is no longer enforceable. It means that if you pay voluntarily, you don’t have the right to ask for your money back because there was an initial reason for your payment. However, you still haven’t paid and your debt is that old, you don’t have to pay it anymore. Furthermore, your lender or collectors don’t have the right to ask for payments from you or bully you into it. If anyone contacts you with such request and tries to bully you into paying, check your debt status first. Consult a lawyer if necessary. Then report the perpetrator to the Federal Trade Commission. The only way to get your rights protected is when you stand up for yourself.
Phantom debts also can be debts that never were yours to start with. Some people sometimes try to collect money from you for a debt that belonged to someone else with the same name or a debt from a deceased relative. However, it is well-known that debts end with death. If debtors can take something from the inherence, they will but under no circumstances should they ask the relatives directly for a full payment of the debts, especially when the debt is an old, long-forgotten one. In some cases, the debt in question has been paid in full or settled. Don’t let yourself to be trapped that way and take some action to protect yourself.
What happens if you don’t pay?
Your lender can impose a further fee because you didn’t have the money in your account or if you have closed it.
- The lender can sue you. It is very important that if you get summoned to appear in court, you should do so. Otherwise, your lender may get a default verdict saying you are guilty based simply because of your failure to appear in Court. In any case, if a judgment is obtained, your lender may also be awarded for the costs that come along with the trial, including a reasonable amount for his lawyer’s fees.
- If you don’t comply with the due date, the lender may start to accrue more money on the principle amount, thanks to interest rates. Normally, the interest rate is limited to approximately 6% per year.
- Your lender has the right to list your past due accounts with credit bureaus. That will have harmful effects on your credit score. In addition, it may prevent you from getting any loan in the foreseeable future and even influence your job opportunities.
- Your lender cannot start legal proceeding until 60 days after the due date of your payment. It is highly recommended that you enter into some sort of negotiations to avoid going to court.
Payday loans are not always as simple as they seem and they have multiple legal implications. In case you need legal help with your payday loans, don’t hesitate to consult your lawyer and do thorough research online. There is almost no information you can’t find. When conducting your research, you should start from your State of residency. After that, you need to find the relevant State regulations and see what restrictions are imposed on legal payday loans. Don’t forget that there are also federal regulations. In case you feel you have been a victim of a payday loan scam, look into the federal laws and contact the relevant authorities that can help you. The most important thing is that you don’t take any rush action like paying up when you are not sure whether you should. In many cases, it may turn out that your rights have been violated. To make sure that you avoid any problems with legal payday loans, just repay in full once they are due. That is the simplest thing you can do. If necessary, cut back on expenses and try to repay payday loans in full when they are due.