You know that payday loans are usually a bad idea. They’re expensive and they trap people in ways that are hard to get out of. The problem is you keep getting sucked back into the vicious cycle of debt because they seem like such an easy fix when you need money quickly.
If you’ve been struggling to get out of your payday loan debt for years now and it feels like there’s no hope left – that is not true. There are ways to get out of payday loans legally once and for all.
To get out of payday loans, you're going to have to take matters into your own hands, start contacting your banks to revoke authorisation and contact your lender to change things right away.
We've put together a guide on how to stop loan payments (depending on your situation) to finally break free from this cycle, get rid of your payday loan, and resolve your loan debt. Our goal is to help you achieve your financial goals and avoid future financial problems.
How to Get Out of Payday Loans Legally
If you’re struggling with your payday loans, here are some steps on how to get rid of payday loans legally.
1. Inform Your Bank That You Are Revoking ACH Authorization
Who is this for?
If your lender is automatically debiting your account every month
If your problem is about how to prevent payday lenders from automatically taking money from your account, then you can try this advice. When you borrow money from a payday lender, the lender may have asked you to sign an ACH (Automated Clearing House) authorization. This authorization gives them the permission to automatically debit or withdraw from your account on your payment.
While you can also inform the payday loan lenders to stop the automatic payments, there are payday lenders who will continue doing so. It’s then better to inform the bank that you’re revoking this authorization that you granted the lender before.
Once you revoke, the bank will be required to stop issuing automatic payments to the lender. You can do this request over the phone or for documentation purposes, you can use this sample letter from the Consumer Financial Protection Bureau (CFPB) when revoking ACH authorization.
2. Issue A Stop Payment Order
Who is this for?
If you want to stop the payments without revoking ACH authorization
Another way to stop the automatic deduction from your account without necessarily revoking ACH authorization is to issue a “stop payment order”. You have to inform your bank about the stop payment order at least 3 days before the payment is due.
You can request stop payment either by telephone or you can also use this sample letter from the CFPB. Take note that banks usually charge a stop payment fee.
3. Ask For An Extended Payment Plan
Who is this for?
You want to pay but you need more time to settle the payday loan debts
A payday loan is designed to be a short-term loan that you should pay within 15 to 30 days. However, most people are unable to pay the amount on time. Most payday lenders will recommend that you “roll over” the loan. Rolling over the loan means delaying the due date by paying a fee.
The problem with rolling over payday loans is that you end up paying fees and high interest installment loans every month without really paying back the original debt amount. If you are unable to pay your fees, these amounts will pile up and you’re left with a more sizable debt than what you started with.
To get out of high interest installment loans, ask the lender to allow you to pay your debt using an EPP or Extended Payment Plan. Payday lenders that are members of the Community Financial Services Association of America (CFSA) usually have this option.
In extended payment plans, you will be allowed to pay back the loan in smaller installments over a longer period of time. This is much preferable because it gives you more time to find or earn the money without having to take another loan that you have to pay in two weeks’ time.
Under an EPP, you will be allowed to pay the total loan amount in equal installments over a longer period (ex: 60 days). This way, you are actually paying off the money you owe rather than just paying the added fees/interest every time you miss the 2-week due date.
4. Find An Alternative Source Of Funds With Lower Interest Fees
Who is this for?
You’re qualified for other loans or credit products with lower interest fees
If you’re eligible to get another type of loan with a more preferable interest rate, then this might be a better option for you rather than rolling over your loan again and again. The very short amount of time allowed by personal loans for you to pay back what you borrowed works against you as the borrower because most borrowers won’t really be able to find the money to pay back that amount.
If you can pay off payday loans with installment with a lower interest rate or borrow against your credit card, then you can use this money to pay back the debt in full. This is better because the next month, you won’t have to pay new fees, instead, you’ll start paying fixed monthly amounts that lessen your loan amount.
For example, you can find emergency loans for the unemployed that will allow you to borrow money and pay it back in installments (3 months to 12 months or more). Use the money to pay off your payday loan and the next month, what you’ll have to pay is the installment loan for an extended period.
5. Pay Off The Loan By Looking For Extra Income Opportunities
Who is this for?
You want to pay the payday loan but you don’t want to get another loan to pay for the amount
If you are looking for a surefire way on how to get out of a payday loan nightmare, the best method is to pay it off. But what if you are not eligible for any other loan with better rates?
Don’t worry because many people who take this type of loan are in the same boat. Maybe the reason why you resorted to personal loans in the first place is that it was your only option.
This does not mean, however, that there’s no way out of your debt. Since payday loans are usually $500 or less, you can find ways to earn extra income so you can pay it off. There are many side hustles that you can find that will pay a decent amount of money.
Here are some links to show you how to earn $1,000 fast and 25 high-paying part-time jobs that you can explore. Getting a source of extra income can also help you earn quick cash instead of turning to this option the next time you’re short of cash.
6. File A Complaint
Who is this for?
You believe that the payday lender is overcharging you, if you’re being asked to pay added fees that are not within your original agreement, or if you were not informed of the fees when you took out the loan
If you believe that the payday lender is charging you unreasonable fees or refuses to work with you on a payment plan, you may be able to file a complaint with the CFPB. Again, the resolution will depend on the laws in your state. Here is a quick summary of State Statutes Regulating Payday Loans as summarized by the National Conference of State Legislatures.
7. File For Bankruptcy
Who is this for?
You don’t have any other options to pay back the debt and you want to be debt free
If you can’t afford to make your payments on your loans, bankruptcy may be the solution. Filing for bankruptcy automatically halts any collection processes initiated by creditors. This is called an “automatic stay”, which means any creditor listed in the petition must cease collection activities such as phone calls or letters trying to collect money owed by the debtor during your bankruptcy proceedings.
In a Chapter 7 bankruptcy, you may be able to discharge your loan completely. A payday loan is considered an “unsecured loan”, meaning you can borrow money without collateral. A Chapter 7 bankruptcy considers unsecured debts as low-priority debts and if you can prove that you don’t have the means to pay them off, they can be erased and you don’t need to pay them off.
A Chapter 7 bankruptcy is then an option if you want total loan forgiveness. Take note, however, that there are pros and cons of filing for bankruptcy so you should only do it as a last option.
8. Consolidate Your Payday Loan Debt
Who is this for?
You’re struggling to pay off multiple payday loans
Consider a payday loan consolidation. It involves taking out a new and bigger loan with a lower interest rate and using the funds to pay off your current multiple loans.
Keep in mind that getting debt consolidation loans only makes sense if the interest rate is lower than the overall interest rate of all your debt combined. Unlike payday loans, a debt consolidation loan can be paid off from 12 to 84 months.
9. Get Credit Counseling
Who is this for?
You need help in managing your debt and finances better
You should consider credit counseling if you need help in improving your financial situation. Many non-profit organizations offer credit counseling services to help consumers negotiate a settlement with lenders and obtain payday loan forgiveness, restructure a more favorable repayment plan, and adjust their budget to pay off their debts fast.
10. Obtain Payday Loan Forgiveness
Who is this for?
You have no other means to pay for your loan in full but you can manage if the amount is reduced
Debt settlement and bankruptcy may grant you payday loan forgiveness. Debt settlement involves talking to your creditors and negotiating a deal that will let you pay less than what you owe.
If you’re unable to reach a deal for debt settlement, you may file for bankruptcy. Your payday loan may be forgiven but bankruptcy will have a negative effect on your credit score.
11. Negotiate With Payday Lenders
Who is this for?
You’re looking for a bit of relief and lower your financial burden
You can negotiate with payday loan companies through a debt settlement that may last between two to four years. How much you need to pay to settle your loan will depend on your lender and the circumstances of your debt such as the age of the loan and if you’re going through financial hardship.
What Happens If I Default on My Payday Loan?
Defaulting on your payday loan will result in accumulated fees and penalties. You’ll also deal with overdraft fees if you authorized direct debit from your prepaid or bank checking account. Or worse, your credit score will take a hit once your lender turns over your debt to a collection agency.
A bad debt such as an unpaid payday loan will appear as a negative mark on your credit report since most collectors report non-payment to the major credit report agencies. When that happens, the negative mark will remain on your file for seven years.
Can you not pay back a payday loan? You can stop making payments by revoking the permission you gave to your lender to automatically debit your account every month.
You may also file for bankruptcy, which will automatically stop the lender’s collection efforts. However, you’ll face a number of serious consequences if you fail to pay back your debt. You’ll face extra fees, deal with a debt collection agency, receive court summons, and find it difficult to secure future financing.
FAQs on Getting Out of Paying Back a Payday Loan
Can The Government Help With Payday Loans?
A lot of people are wondering whether it is possible to get government help with payday loans. Is there a way to find payday loan debt assistance from the government? If you can’t pay this type of debt, the government doesn’t have a specific program to help you get out of it unless you file for bankruptcy (which will be discussed in the next section). However, there are actually state laws that protect consumers from being exploited by lenders.
Depending on the state that you live in, you can find out what laws are in place regarding this type of loan including the maximum loan limits, loan terms, and finance charges allowed by the state.
State governments uphold payday lending statutes to protect consumers from predatory lenders. For instance, the annual percentage rate must not exceed 36% in New Hampshire while the interest must not exceed a rate of 28% per annum in Ohio.
Can I Go to Jail For Not Paying Back an Online Payday Loan?
According to the Consumer Financial Protection Bureau, failure to pay back a payday loan or any kind of debt is not a felony, and that means you cannot go to jail for that reason. But if your debtor sued you and you failed to appear in court, an arrest warrant will be issued against you for contempt of court. Therefore, it’s non-appearance in court that will get you arrested and not your debt.
Can I Close My Bank Account to Stop Payday Loans?
You can close your account before the lender takes the payment. However, you’ll still be legally responsible to pay back the loan. You’ll also face overdraft fees when the lender tries to complete the transaction by cashing in the check you issued or withdrawing money from your account. If you leave an overdrawn account behind, it may prevent you from opening a new account from a different bank.
Stop Payday Loan Payments Forever
Consumers often turn to payday loans or personal loans whenever they need fast cash. You’ll be fine if you know, for sure, that you can pay off the loan when your next paycheck comes. But if you’ll depend on this type of loan for your essential expenses, then you’ll eventually find yourself stuck in the debt trap and wondering how to pay off multiple payday loans.
Fortunately, there are ways for you to legally get out of paying payday loans, such as filing for bankruptcy. If you want to finally get out of paying astronomical payday loan fees and interest rates, you can follow the tips listed in this guide so you can close off your payday loan.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
