What is a payday loan?
A payday loan is a short-term, high-cost loan that must be paid back on or before your next payday. It doesn’t matter whether your income is from employment or government benefits.
Who can make a payday loan?
Payday loans are made by storefront lenders, check cashers, pawn shops, credit unions, banks and Internet-based providers. In Washington, anyone providing a payday loan, including Internet payday lenders, must be licensed by the Washington State Department of Financial Institutions (DFI).
How long can I take out a payday loan for?
The maximum loan term in Washington is 45 days. There’s no minimum loan term. The term for most payday loans is 14 days.
How much can I get a payday loan for?
The maximum amount of money any one lender can loan you at one time is $700.
Why do I hear so much about payday loans in the news?
Payday lending was illegal in Washington until 1996. Since then, the payday loan industry has grown exponentially, as the number of payday loan locations increased 90% since 2000. Almost 3.2 million payday loans — totaling a staggering $1.3 billion — were made in Washington in 2008 alone.
Payday loans aren’t approved based on any creditworthiness check as is done with a standard loan. Payday loans don’t show up on a credit report, and can’t therefore improve your rating if you pay the loan back on time. Payday loans can only harm your credit rating, if a delinquent account is referred to collections and reported to a credit reporting agency.
How does the process work?
You write a post-dated personal check to the payday lender, or you authorize the payday lender to take the money directly out of your bank account on the date of the check or authorization (we’ll call this ACH authorization for short throughout this publication). Generally, this is on your next payday. On the date the payday loan is due, you either give the payday lender cash in return for your post-dated check, or you let the lender deposit your check. If you authorized the payday lender to take the money directly from your account, the lender will do so on the due date.
Should I take out a payday loan?
Payday loans are extremely expensive and difficult to pay back on a tight budget. Look for other options (see “What other options do I have …” paragraph below) and avoid taking out a payday loan. Otherwise, you could get stuck in a cycle of debt by using one payday loan to pay off another.
Am I eligible for a payday loan?
State law prohibits a lender from making a payday loan to you if any of the following is true of you:
-You currently have one or more outstanding payday loans totaling $700 or equal to 30% of your gross monthly income, whichever is less;
-You currently have an installment plan to pay off a previous payday loan;
-You’ve taken out 8 loans in the last 12 months;
-You’re in default on another payday loan.
How does the lender figure out whether I’m eligible?
Any payday lender you apply for a loan with must determine your eligibility by checking a statewide payday loan database to see whether you have any other payday loans or debts from payday loans as described above. You give the lender the following information:
- your Social Security number (or other ID number if you don’t have a Social Security number)
- info about your gross monthly income
The lender puts your information into its statewide database to check to see if you’re eligible for a payday loan and, if so, how much of one (because as mentioned above, you can’t borrow more than $700 or 30% of your gross monthly income, whichever is less, at any one time). If the database says that you’re NOT eligible, the lender will give you a toll-free number to call for more information.
How much do payday loans cost?
In Washington, payday lenders commonly charge the maximum amount allowed by law (RCW 31.45): 15% for the first $500 borrowed, and 10% above $500 up to $700. The following chart shows the maximum amount that a payday lender can charge you.
|Amount Borrowed||Cost of Loan (in dollars)|
Payday lenders are required to tell you, in a contract that you sign, how much the annual percentage rate (APR) is for the money you borrow. The APR is the interest rate for your loan spread over a period of a year. The less time you have to pay back the loan, the higher your APR will be.
Are payday loans more expensive than other types of credit?
Yes. Less expensive types of credit include a personal line of credit at your bank, a credit card cash advance, and one overdraft charge on one bounced check. Below is a comparison chart with examples of several credit options.
|Payday Loan||Personal Line of Credit||Credit Card Cash Advance||Overdraft Fee (one bounced check)|
|Days to repay loan||14 days||14 days||14 days||14 days|
* Some personal lines of credit may have an annual fee; if there is one, the corresponding APR may be higher than what is reflected on this chart.
Is the payday lender required to tell me how much my loan will cost?
Yes, the law requires the lender to tell you the terms of the loan, including the amount of fees and the APR.
While most storefront lenders provide this disclosure in the paperwork you sign, many Internet-based payday lenders don’t provide this disclosure until after you have clicked “yes” to taking out the loan. This is illegal and may make the loan unenforceable. All payday lenders must provide these disclosures before you agree to take out a loan. Contact the Department of Financial Institutions (DFI) immediately to report the problem by calling 1-800-RING-DFI (746-4334) or contacting them online at www.dfi.wa.gov.
Note: Lenders are not required to explain to you in plain terms how much your payday loan will cost if you’re unable to pay it back by the due date or if you take out successive loans.
Are there any other fees involved in a payday loan?
If you receive your loan in the form of a check from the payday lender, the payday lender CANNOT charge you a fee for cashing their check.
What other options do I have instead of taking out a payday loan if I’m out of money and still have bills to pay?
- Try to make arrangements with creditors. Utility companies, credit card companies, and landlords often allow extra time to pay. Also consider the cost of late fees. They may be less than the cost of taking out a payday loan.
- Borrow from friends or relatives.
- Seek assistance from religious institutions or social service agencies. Contact the Washington State Department of Social and Health Services (DSHS) to find out if you’re eligible for one of their emergency assistance programs.
- Shop around. Banks, credit unions, and finance companies offer alternatives to payday loans including small consumer loans.
- Check with your employer to see if they have a program that allows employees to get an advance on their next paycheck.
- Contact a credit counselor. A counselor can help you get out of debt and avoid a payday loan. Check with your bank or credit union about in-house credit counseling.
What happens if I took out a payday loan but I can’t pay it off?
Remember: the payday lender has your check and can cash it on the date that payment is due. If you don’t have enough money in your account, your check will bounce and your bank will charge you a fee. The payday lender also will charge you a bounced check fee.
Some payday lenders might try to cash the check several times. Each time the check bounces, the bank will charge you an overdraft fee.
While some types of government benefits (example: SSI) are normally not garnishable by a debt collector, payday loans are different. By writing a check on your account or authorizing the payday lender to remove money directly from the account, you’re giving the payday lender permission to take money out of your account – regardless of what types of funds are in the account.
Try to talk to someone at your bank, in person at a branch or on a customer service line. You can explain the situation, and ask if the bank could reverse any fees or charges on your account resulting from the bounced check. If you’re having the payday loan money automatically deducted from your bank account, ask the bank to stop that automatic deduction.
In extreme cases, consumers caught in the debt trap have stopped payment on the check, terminated their bank account, and reopened a new bank account. Contact an attorney to discuss these considerations.
At some point, the payday lender might send your debt to collections. In the end, you may still owe the amount you borrowed, plus the fee, plus the overdraft charges, plus the bounced check fee, plus possible collections fees, plus possible court costs if the payday lender or collection agency sues you for the debt.
Can I ask the payday lender for a payment plan?
Yes. On or before your loan comes due (even if it’s your first loan), if you notify your payday lender that you’re unable to pay the loan when it’s due, the lender must tell you that you can have an installment plan.
Any such plan must be in writing and signed by you and the lender.
If your loan is for $400 or less, the installment plan must be at least 90 days. If your loan is for more than $400, your installment plan must be at least 180 days.
Are there any fees involved in the installment plan?
Your lender cannot charge you a fee for entering into an installment plan.
If you miss a payment on your payment plan, the lender can charge you a one-time default fee of $25 and initiate collection on your defaulted loan.
Can I cancel my loan?
Yes, but you must cancel (or “rescind”) it on or before the close of business on the next day of business after you took out your loan. You cancel the loan by repaying the lender the amount that was advanced to you. In return, the lender must return or destroy your postdated check or cancel any electronic withdrawal from your bank account.
You must cancel your loan at the same location where you got your loan.
Example: if you took out a payday loan on Tuesday, and you later decide that you don’t want the loan, you must return to that same payday lender before it closes on Wednesday. If the lender is open 24 hours, you must return to the lender before midnight the next day.
You shouldn’t be charged any fee for canceling your loan. If you try to cancel your loan by the deadline but the lender charges you a fee or refuses to cancel your loan, contact DFI immediately to report the problem.
Your loan documents should have included information about your right to cancel your loan. If your loan documents didn’t include this information, contact DFI.
Should I deal with my overdue payday loan by paying a fee and taking out another payday loan?
No. Any payday lender that has you pay an additional fee to “roll over” your payday loan to make the entire loan due later is violating Washington law, and you should contact DFI.
Washington law requires that the borrower pay off an existing loan first before taking out another loan with that lender. To avoid being caught in a debt trap, avoid taking out another payday loan to pay back the first payday loan. These loans are so easy to get that many people think that paying them back will be just as easy. Once a borrower gets into the cycle of paying off a loan and immediately taking out a new one to cover other bills, this cycle is hard to break. Many borrowers end up taking out several loans in a year because they end up taking out one at every pay day to pay the last one back or to pay other bills. This is extremely expensive, and you’ll end up paying far more in fees and costs than you ever intended to borrow. If at all possible, try to use the alternatives listed in the “What other options do I have …” paragraph above.
Can I close my checking account to try to stop a payday lender from removing money from my account?
Yes, but there may be consequences. The payday lender will probably take collection action quickly. When you take out a payday loan, you either write the lender a personal check or give the lender permission to debit money directly from your checking account. If you close the checking account to keep the lender from taking out the money you owe, the payday lender might continue to try to take money out of the account by attempting to cash the check or debit money from the account. That could result in overdraft fees owed to your bank.
The payday lender might send your loan to collections. If this happens, additional fees and costs will be added to the amount you owe. If you don’t pay the debt while it’s in collections, the collection agency might try to sue you in court to try to get you to pay the money you owe.
To avoid the collection actions described above, first try talking to the manager of the store where you got the payday loan to see if the manager would be willing to let you pay what you owe in an installment plan. Explain to the manager what your situation is, why you can’t pay all the money that you owe at one time, and that you need to pay it back over a period of several months. If you’re allowed to repay the money owed in an installment plan, make your payments on time to avoid the collection actions described above.
Additionally, if you close your account at one bank and then try to open an account at a new bank, you could have difficulties. Some banks won’t open a new account if the prospective customer owes money to another bank. If this happens to you, contact DFI, or whatever regulatory agency has jurisdiction over the bank that refuses you service.
If a payday lender sues me and gets a judgment against me, can they collect on that judgment if my only income is from social security or a pension?
If the only money in your bank account is from social security or a pension, that account cannot be garnished by a judgment creditor. There are exceptions to this general rule, including exceptions for the collection of taxes and child support, but there is no exception for the benefit of payday lenders.
However, even if you haven’t been sued, if your income is exempt, you must be vigilant to protect it from being seized by a payday lender. If the payday lender has your checks, or authorization to access your account, it doesn’t need to sue you to get paid. Accordingly, you can try to terminate the payday lender’s access to the funds in your account. To do so you may have to close the account and move your money to an account at another bank. However, as noted above, some banks won’t open a new account if you owe money to another bank.
If your social security benefits or pension payments are automatically deposited into a bank account that a payday lender has your permission to access (via your check or authorization), you can redirect where your automatic deposits are made. Information on changing automatic deposits of social security benefits can be obtained at www.socialsecurity.gov. Avoid any lender who wants you to have your social security checks deposited directly into a bank account controlled by the lender. Reports nationwide indicate that seniors are left with little or no income after receiving what’s left of their monthly benefits check under this arrangement.
Don’t commingle nonexempt funds with your social security and pension money. Example: if a birthday check from a family member is deposited into the same account as your exempt social security funds, you won’t be able to argue that all funds in the account are exempt from garnishment.
If you get sued, you must answer the lawsuit and any subsequent garnishment notice by notifying all parties in writing that your bank account can’t be garnished because it contains only exempt funds.
More information about protecting exempt assets can be found in the following brochures available at www.washingtonlawhelp.org:
- Debtors’ Rights with Collection Agencies
- Debtors’ Rights in a Lawsuit
- How to Answer a Lawsuit for Debt Collection
- How to Claim Personal Property Exemptions
Can the lender threaten me with criminal prosecution as a method of collecting a payday loan?
No. It’s illegal for a payday lender to threaten to throw you in jail or threaten to prosecute you criminally for an unpaid debt. If this happens to you, you should immediately file a complaint with DFI. You can also complain to DFI if payday lenders are harassing you by calling your home or work more than a few times per day, showing up at your worksite, talking to your children about the debt owed, etc.
Generally, when collecting or trying to collect a payday loan, the lender may not harass or intimidate you. The lender cannot contact you or your spouse more than 3 times in one week, and may not contact you at home between the hours of 9 p.m. and 7:30 a.m.
If you feel that you’ve been harassed by a payday lender in their effort to collect on your loan, contact DFI to file a complaint. See info below about where to file a complaint.
What are my rights as a military borrower?
As of October 1, 2007, payday lenders must comply with a new federal law that limits the APR that can be charged to military families on payday, tax refund anticipation, and auto title loans to 36%. In addition, lenders cannot accept checks or authorization to remove money from a military family’s checking account as collateral for a loan.
I took out a payday loan on the Internet, and the payday lender is charging a higher rate than permitted under Washington law. What can I do?
Effective July 22, 2007, Washington law requires every lender offering a payday loan to Washington residents be licensed by DFI. All payday lenders offering loans to Washington citizens must comply with Washington law. If the payday lender isn’t licensed, then the payday loan is unenforceable and uncollectible. In addition, if the payday lender is charging a higher rate than allowed by law in Washington, the payday loan is unenforceable. Contact DFI immediately to report this violation.
Can I file a complaint about a payday lender?
Yes. DFI takes complaints from consumers about their experience with payday lenders and investigates those complaints. Example: if the payday lender repeatedly bounced your check with your bank or harasses you to pay back the loan, you should report the problem to DFI. You can contact DFI by filling out a complaint form online at http://dfi.wa.gov/cs/complaint.htm, or calling 1-800-RING-DFI (746-4334) (TDD: 360-664-8126) or (360) 902-8700. You may also contact DFI by fax to the Department of Financial Institutions, (360) 596-3868, or by mail or hand-delivery to 150 Israel Road SW, Tumwater WA 98501.
Who can I call for help if I’m in a payday loan debt trap or I think the payday lender has violated the law?
- Solid Ground: The Predatory Lending program at Solid Ground can provide advice and assistance to help consumers statewide, regardless of income, get out of the payday loan debt trap. This program can be reached by calling (206) 694-6776 or 1-866-297-4300.
- Northwest Justice Project (NJP): NJP provides legal advice and assistance to low-income people statewide. If you are low-income and live outside of King County, call Northwest Justice Project’s CLEAR line for advice and referrals at 1-888-201-1014, Mondays-Fridays from 9:15 a.m. to 12:15 p.m. If you’re low-income and live in King County, call (206) 464-1519 for an intake appointment. If you’re age 60 or over, whether you live inside or outside King County, call CLEAR*Sr at 1-888-387-7111. You can also dial 211 to reach an operator who can refer you to a host of legal services.
- If you’re not low-income, call a lawyer referral service listed on the Washington State Bar Association website: http://www.wsba.org/Resources%20and%20Services/Find%20Legal%20Help .
- Washington State Department of Financial Institutions (DFI): See contact information in the section above.
- Federal Trade Commission (FTC): The FTC takes consumer complaints online at www.ftc.gov. Just click on “contact us” at the bottom of the page. Or make a consumer complaint by phone by calling toll-free 877-FTC-HELP (382-4357) between 9:00 a.m. and 5:00 p.m. Eastern Standard Time, Monday through Friday.