Consumer Protection for a Payday Loan


Most people have heard of a payday loan and many have even taken one out for one reason or another. This short-term loan is designed to help people out of a financial crisis, whether that person has good or bad credit. While beneficial in many ways, people need to understand that often, a loan of this type has higher interest rates over a more conventional loan. However, considering that anyone with a bank account and income would qualify and that the money is provided in as little as 30 minutes, the tradeoff is worth it.

A payday loan is simply unsecured credit and most lenders offer favorable terms. The way a lender sets up a loan like this, whether a local or online lender is they require the borrower to provide a post-dated check for the loan amount, plus interest and any applicable fees. As long as the check goes through as scheduled, the loan would be paid off, the borrower would have positive feedback sent to the credit bureaus, and everything is done. However, if for any reason the check were to bounce, the lender would apply a stiff penalty onto the loan balance and the individual would be charged a penalty by the bank.

The duration of a payday loan is typically two weeks although some go longer. Additionally, while it is in the best interest of the borrower to have the loan paid off according to schedule, sometimes an extension is needed. In this case, the lender would have the borrower sign a legal document and push the loan out to a date another two weeks away. If possible, the borrower should get the payday loan paid off quickly in that each payoff extension means a higher interest rate and new fees.

As far as the amount of interest tacked onto a payday loan, this would vary from one state to another. Interest rates for loans such as this are governed by state laws but considering that an Annual Percentage Rate or APR is used, these rates can be upwards of 30%. The reason is that when an APR is used for a long-term loan, rates are low but when used for a short, two-week loan, the numbers come out high.

One of the most fascinating aspects of a payday loan is that with state laws overseeing regulations, consumers are actually well protected. As long as the borrower chooses a reputable and professional lender, the consumer locks into a loan that is considered low risk. In fact, loans of these types are so restrictive that many states no longer offer them to include Connecticut, District of Columbia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Vermont, West Virginia, Puerto Rico, and the Virgin Islands.

Even so, what people living in any of these states and territories need to remember is that while a payday loan from a brick and mortar lender is impossible, many online lenders could still help. Because of this reason alone, the number of online lenders for a payday loan has skyrocketed. In fact, online lenders actually offer numerous benefits over a standard lending company.

Unfortunately, if a person does not pay the payday loan off as initially agreed, it would be easy to see a $400 loan turn into a $2,000 payoff after the increased interest rate and fees for multiple extensions. If the borrower starts to miss payments, payday loan companies have the same rights as other lenders do in asking for help from collection companies. Most of the collections companies used employ sharks, which only add to a person?s stress. To stop the harassing collection process, consumers do have options.

It all starts by choosing a highly qualified lender and if the borrower runs into a problem in making a payment, he or she needs to immediately contact the lender to discuss the issue. Ignoring phone calls from the lender would only escalate the problem. If this type of loan ends up in collections, people need to understand that under the Fair Credit Reporting Act, the borrower can send a letter to the collection company, requesting that all phone calls stop and by law, they have to stop. To ensure the collection company receives this request, people should always send the cease letter via certified mail.

Additionally, many states where a payday loan is still allowed prohibit or limit collection activities for lenders such as this. For example, in the state of Arkansas, the Attorney General has now set a law in motion whereby collection companies must stop efforts and void all payday loan contracts. Because of this, many lenders in this and other similar states now work under the loan option of check cashing or short-term loans rather than an actual payday loan.

Obviously, a payday loan is highly beneficial for many people and simply following the rules is all it takes to get fast money, good credit reporting, and a paid off loan. Again, any borrower needs to find a qualified lender, which protects them but also means the company is established in a professional manner so problems seldom arise.