Payday Loans and Legal Action: What You Need to Know

Inside Subprime: Feb 18, 2019

By Grace Austin

Payday loans may seem like one of the only options for those with bad credit who need cash quickly — but they also lead to a cycle of debt as borrowers deal with high interest and additional fees stacked on to their initial loans. And legal action can follow if a borrower doesn’t pay back the loans, making a potentially dire financial situation even worse.

If a borrower stops making payments, a payday loan firm can take a borrower to court. But until those payments stop, many experts say that it’s almost impossible to be sued. However, it all depends on the wording in the payday loan contract.

If a borrower does default on a loan with late or missed payments, then a lender can start tacking on additional fees and draining a borrower’s bank account. If a borrower is late enough, then those payday loans can be sent to a collection agency, which would mean hits to a borrower’s credit and frequent collection calls about paying back the debt.

From there, the payday lenders, but most likely collection companies or law firms, could eventually sue a borrower. That’s because payday lenders often sell their accounts to debt collectors or attorneys for a fraction of the debt.

Experts warn not to assume that a borrower will not be sued, even if the initial loan amount owed is a relatively small amount. That’s because through additional fees and court costs that figure can skyrocket.

If a borrower is sued, most of the time, there are few legal options to fight against it, besides fraud, for example, like loans that were taken out unknowingly in a borrower’s name, or deceptive and illegal practices by the payday lender, which can be the case in states where payday loans are against the law.

But experts encourage borrowers facing legal action to always show up for a court summons, and before that, to potentially try to negotiate with debt collectors before it does have to go to court. Any negotiation with a debt collector should be in writing and should indicate the debt will be gone with whatever payments are settled on.

The Consumer Financial Protection Bureau recommends not ignoring “a lawsuit summons or other notices from a court or the lender, or any court proceedings against you. If you ignore a lawsuit, you may lose the opportunity to fight a wage or bank garnishment.”

Ignoring a summons when a borrower is sued or a judgment is ruled against the borrower could also lead to a warrant for that borrower’s arrest.

The CFPB recommends going to court and providing any required information, and potentially reaching out to a lawyer for help.

So what if, as a borrower, you would like to pursue legal action against a payday lender? There are numerous instances of borrowers receiving money back from deceptive lenders, both individually and collectively.

Payday lenders need to be licensed to do business, and laws regulating payday loans have become stricter in many states. A review of a borrower’s contract can help shed light on whether anything was illegal about a borrower’s payday loan, including being charged over legal interest rate caps or illegal fees.

Payday lenders or debt collectors can also be guilty of violating laws against harassing phone calls. Debt collectors are not allowed to continue calling if a borrower explicitly tells them to stop calling.

Some states have clear-cut instructions if a borrower does believe the lender has violated the law. In Michigan, for example, the attorney general says customers should contact them in writing and provide evidence. From there, the payday lender is required to find out if they did something illegal and move forward with certain steps.

It’s also a good idea to consult with a lawyer or legal aid to see what options are available if a borrower suspects they’ve been duped by a disreputable payday lender.

For more information on payday loans, scams, and cash advances and check out our city and state financial guides including Florida, IllinoisTexas and more.