Washington

Payday Loans: What to do if You Get Caught in the Debt Trap

Authored By: Northwest Justice Project LSC Funded
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What is a payday loan?

A payday loan is a short-term, high-cost loan that you must pay back on or before your next payday.  It does not matter whether your income is from employment or government benefits.

Who can make a payday loan?

  • storefront lenders
  • check cashers,
  • pawn shops
  • credit unions
  • banks
  • Internet-based providers

In Washington, anyone providing a payday loan, even online lenders, must have a license from the Washington State Department of Financial Institutions (DFI).

How long can I take out a payday loan for?

The maximum term in Washington is 45 days. There is no minimum term. The term for most payday loans is fourteen days.

How much can I get ?

The maximum amount any one payday lender can loan you at one time is $700.

Why is there so much about payday loans in the news?

Payday lending was illegal in Washington until 1996.  Since then, the payday loan industry has grown a lot. The number of payday lenders has gone up 90% since 2000.  Lenders made almost 3.2 million payday loans -- totaling $1.3 billion -- in Washington in 2008 alone. 

You do not get approval for a payday loan based on any creditworthiness check, as with a standard loan.  Payday loans do not show up on a credit report. They cannot improve your rating if you pay the loan back on time.  Payday loans can only hurt your credit rating if you fall behind in payments. The lender can refer your delinquent account to collections and report you to a credit reporting agency.

How does the process work?

You write a post-dated personal check to the payday lender, or you authorize them to take the money directly out of your bank account on the date of the check or authorization (we will call this ACH authorization for short throughout this publication).  Generally, this is on your next payday. 

When the payday loan is due, either you 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?

You should look for other options (see "What other options do I have …" paragraph below) and avoid taking out a payday loan. Payday loans cost a lot. They are hard to pay back on a tight budget. You could be stuck in a cycle of debt by using one payday loan to pay off another.  

Am I eligible for a payday loan?

Under state law, you are not eligible if any of the following is true:

  • You currently have one or more outstanding payday loans totaling $700 or equal to 30% of your gross monthly income, whichever is less;

OR

  • You currently have an installment plan to pay off a previous payday loan;

 

OR

  • You have taken out eight loans in the last twelve months;

 

OR

  • You are in default on another payday loan.

How does the lender decide I am eligible?

They must check 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 do not have a Social Security number)

  • info about your gross monthly income

The lender puts your information into its statewide database to see if you are eligible for a payday loan and, if so, how much it can loan you. (You cannot borrow more than $700 or 30% of your gross monthly income, whichever is less, at any one time.)  If the database says you are 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)

$100

$115

$200

$230

$300

$345

$400

$460

$500

$575

$600

$685

$700 (maximum)

$795

Payday lenders must tell you, in a contract 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 year.  The less time you have to pay back the loan, the higher your APR will be.

Do payday loans cost more than other types of credit?

Yes.  Cheaper types of credit include:

  • a personal line of credit at your bank

  • a credit card cash advance

  • 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)

$ Borrowed

$300

$300

$300

$300

Days to repay loan

14 days

14 days

14 days

14 days

Interest rate

None

12.81%

18.8%

None

Fee

$45

None *

$13.50

$28.75

Total Cost

$45

$1.47

$15.66

$28.75

APR

391%

12.81%

135.75%

250%

* Some personal lines of credit may have an annual fee. If so, the corresponding APR may be higher than what is reflected on this chart.

Does the payday lender have to tell me how much my loan will cost?

Yes. By law, the lender must tell you the terms of the loan, including the amount of fees and the APR.

Many online payday lenders do not provide this disclosure until after you have clicked "yes" to taking out the loan.  This is illegal. It may make the loan unenforceable.  (Most storefront lenders provide the disclosure in the paperwork you sign.)

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 a problem by calling 1-800-RING-DFI (746-4334) or contact them online at www.dfi.wa.gov.

  • Lenders do not have to explain to you in plain terms how much your payday loan will cost if you are 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 get your loan in the form of a check from the payday lender, the payday lender CANNOT charge you a fee for cashing their check.
 

I am out of money. I still have bills to pay. What other options do I have besides taking out a payday loan?

  • Try to work out a payment plan with creditors.  Utility companies, credit card companies, and landlords often allow extra time to pay.  The cost of late fees may still be less than the cost of taking out a payday loan.

  • Borrow from friends or relatives.

  • Seek help from religious institutions or social service agencies.  Contact the Washington State Department of Social and Health Services (DSHS). You might be 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. They might have a program that allows you to get an advance on your next paycheck.

  • Contact a credit counselor.  One can help you get out of debt and avoid a payday loan.  Your bank or credit union might have in-house credit counseling.

I took out a payday loan. I cannot pay it off. What will happen?

The payday lender has your check. It can cash it on the date payment is due.  If you do not have enough money in your account, your check will bounce. Your bank and the payday lender will each charge you a 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. 

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 give the payday lender permission to take money out of your account – no matter 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.  Explain the situation, and ask if the bank could reverse any fees or charges on your account resulting from the bounced check. If you are having the payday loan money automatically deducted from your bank account, ask the bank to stop the automatic deduction. 

In a few cases, consumers caught in the debt trap have stopped payment on the check, closed their bank account, and reopened a new bank account.  Contact a lawyer to discuss this option.

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, and 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 is your first loan), if you notify your payday lender that you are unable to pay the loan when it is 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?

If you miss a payment on your payment plan, the lender can charge you a one-time default fee of $25 and start collection on your defaulted loan. 

Your lender cannot charge you a fee just for entering into an installment plan.

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 they advanced 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 place where you got your loan. 

  • Example:  You took out a payday loan on Tuesday. You later decide that you do not 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.

The lender should not charge you 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 did not have this information, contact DFI.
 

I have an overdue payday loan. Should I deal with it 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 and make the entire loan due later is violating state law. Contact DFI. 

Under Washington law, you must 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 you might think paying them back will be just as easy.  You can get 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.  You could end up taking out several loans in a year because you end up taking out one at every payday to pay the last one back or to pay other bills.  You will end up paying far more in fees and costs than you ever meant to borrow.  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 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 take money directly from your checking account.  If you close the checking account to keep the lender from taking what you owe, the lender might keep trying to cash the check or withdraw money from the account anyway.  That could result in overdraft fees owed to your bank.

The payday lender might send your loan to collections.  Then there will be additional fees and costs.  If you do not pay the debt while it is in collections, the collection agency might try to sue you to try to get you to pay what you owe.

To avoid collection actions, first try talking to the manager of the store where you got the payday loan. See if the manager will let you pay what you owe in an installment plan.  Explain to the manager:

  • your situation

  • why you cannot pay everything you owe at once

  • you need to pay it back over several months

If they agree to let you repay what you owe in an installment plan, make your payments on time to avoid the collection actions described above.

You could have a hard time closing your account at one bank and then trying to open an account at a new one.  Some banks will not open a new account if you owe another bank.  If this happens to you, contact DFI, or whatever regulatory agency has jurisdiction over the bank that refused you service.
 

A payday lender sued me. It got a judgment against me. My only income is from social security or a pension. Can they collect on that judgment? 

It depends. If the only money in your bank account is from social security or a pension, a judgment creditor cannot garnish the account.  There are exceptions to this general rule, but not for the benefit of payday lenders. 

Even if a creditor has not sued you, if your income is exempt, you must be on your guard to keep a payday lender from seizing it.  If the payday lender has your checks, or authorization to access your account, it does not have to sue you to get payment. 

You can try to terminate the payday lender's access to the funds in your account.  You may have to close the account and move your money to an account at another bank.  Some banks will not open a new account for you if you owe a different bank. 

If you have your social security benefits or pension payments 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.  Read more about changing automatic deposits of social security benefits at www.socialsecurity.govAvoid any lender who wants you to have your social security checks deposited directly into a bank account controlled by the lender.  There are stories of seniors who have little or no income left over after getting what is left of their monthly benefits check under this arrangement. 

Do not commingle nonexempt funds with your social security and pension money.  Example:  if you deposit a birthday check from a family member into the same account as your exempt social security funds, you cannot argue that all funds in the account are exempt from garnishment. 

If the creditor sues you, you must answer the lawsuit and any garnishment notice by notifying all parties in writing that your bank account cannot be garnished because it contains only exempt funds.

There is more information about protecting exempt assets in the following publications available at www.washingtonlawhelp.org:

Can the lender threaten me with criminal prosecution to try to get me to pay?

No.  It is 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, 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, and so on.

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 three times in one week
  • Contact you at home between 9 p.m. and 7:30 a.m.

*If you feel that  a payday lender has harassed you in its effort to collect on your loan, contact DFI to file a complaint.  See info below about where to file a complaint.


I am a military borrower. What are my rights?

Federal law limits THE APR payday lenders can charge to military families on payday, tax refund anticipation, and auto title loans to 36%.  Lenders cannot accept checks or authorization to withdraw money from a military family's checking account as collateral for a loan.

I took out a payday loan online. The payday lender is charging a higher rate than state law allows. What can I do?

Under Washington law, every lender offering a payday loan to Washington residents must have a license to do so from DFI.  All payday lenders offering loans to Washington citizens must comply with Washington law.  If the payday lender is not licensed, the payday loan is unenforceable and uncollectible.  If the payday lender is charging a higher rate than allowed Washington law allows, the payday loan is unenforceable.  Contact DFI immediately to report such violations. 

Can I file a complaint about a payday lender?

Yes.  DFI investigates complaints from consumers about their experience with payday lenders. 

Example:  if the payday lender keeps bouncing 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.

I am in a payday loan debt trap or I think the payday lender has violated the law. Where can I get help?

  • Solid Ground: Solid Grounds' Predatory Lending program can provide advice and help for consumers statewide, regardless of income, to get out of the payday loan debt trap.  Call (206) 694-6776 or 1-866-297-4300.

  • Northwest Justice Project (NJP): NJP provides legal advice and help 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 9:10 a.m. to 12:25 p.m.  If you are low-income and live in King County, call (206) 464-1519 for an intake appointment.  If you are age 60 or over, whether you live inside or outside King County, call CLEAR*Sr at 1-888-387-7111.  You can also call 211 to reach an operator who can refer you to a host of legal services. 

  • If you are 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. 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. 


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This publication provides general information concerning your rights and responsibilities. It is not intended as a substitute for specific legal advice.
This information is current as of June
2013.

© 2013 Northwest Justice Project. 1-888-201-1014
(Permission for copying and distribution granted to the Alliance for Equal Justice and individuals for non-commercial use only.)