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A payday loan is a type of short-term loan wherein a lender will extend a high-interest credit based on your income, to help you borrow money online instantly. These loans are typically based on how much you earn (and thus typically require a pay stub when being applied for) and its principal is usually a portion of your next paycheck.

Also known as cash advance loans or check advance loans, these high-interest loans are not available in all states. Sixteen states: Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia – in addition to the District of Columbia outlaw any kind of payday loan.

Payday loans are designed to cover short-term expenses and can be taken out without collateral or even a bank account. However, the high interest that can be charged on these loans means that any borrower should beware of these loans and ensure that they do not fall into a debt trap made for consumers.

In an effort to prevent any debt traps, in the states where such loans are permitted, laws are in place which act to regulate their high fees and interest rates.

Efforts to regulate payday lenders were proposed under the Obama administration and put in place in 2017 when the Consumer Financial Protection Bureau (CFPB) passed rules to protect consumers from what then-Director Richard Cordray called “debt traps.”

Under the Biden administration, the new leadership at the CFPB established even stricter rules for payday lending. These rules became mandatory on June 13, 2022.

Can I Stop Paying a Payday Loan?

In practice, it’s very rare for a payday loan debt to be written off as a result of payday lenders’ ability to make substantial sums from the interest they charge on the loans.

The records of your payday loan may be kept for 6 to 10 years by credit bureaus; the companies that calculate credit scores and so it is unlikely a payday loan can be escaped once settled. Although payday lenders may not report to the credit bureaus, the loan may be filed once it has passed to the collectors after the lender sells the debts.

Failure to pay your payday loan may consequently affect your ability to borrow money in the future.

If you default on your payday loan, your debt may also be placed in the hands of a collection agency which may result in a dip in your credit score. If you repay your payday loan on time, your credit score should not be affected.

In short, you should try to pay off any payday loans in good time to avoid any damaging consequences. If you cannot pay back a payday loan, the account may be sent to a collection agency, which will pursue you for the money and interest that you owe. This may result in money being added to your overall debt as well as your credit score being damaged.

Repaying a Payday Loan

The payday loan should be paid back within a short period, generally 30 days or less, which will include the fixed interest rate on the loan. The loans are usually meant to be paid off in one lump-sum payment when you receive your paycheck. Therefore, if you for example get a 500 dollar loan, you will need to pay back the loan plus interest by the agreed repayment date.

The most common way to pay back a payday loan is through your bank debit card. When you get the loan you agree to let the lender take the money. If there is not enough money in your account to repay the loan, charges will be added for late payment.

If you cannot afford to repay the loan, you can instruct your bank or card provider to stop the payment from being taken at least one day before the payment is due. If you are struggling to payback the loan, the lender may offer you longer to pay by rolling the loan over but should not do this more than twice to avoid being charged extra interest.

A payday loan should either be paid on time to avoid any negative consequences or avoided, and other (safer) personal loan alternatives considered instead.