Payday loan, also called payday advance, is a small, short term and unsecured loan that you can take for an immediate financial requirement. The loan, typically below 500$ is due the next payday or within the period specified by the lender. The borrower can give the lender access to his checking account or write a check for the loan amount to be paid off when the next paycheck arrives.

Consumers can repay the loans as a lump sum (preferably to avoid a debt cycle) or in installments period of time. Different lenders in various states tend to have unique repayment rules and regulations.

What troubles can you face?

A payday loan is an excellent option when you are cash strapped and need money urgently. However, the consumer must keep in mind that the Annual Percentage Rate (APR) of a payday loan is high. Many people take out payday loans to meet their burgeoning lifestyle expenses and fall into a debt trap because of high-interest rates.

Unauthorized lenders tend to cheat their consumers by charging exorbitant interest rates, more than initially disclosed. Also, there might be lenders who do not let their consumers repay the full amount or those who do not follow the state regulations.

These problems highlight the importance of legal rights for a payday loan, for both borrowers and lenders.

What are the legal rights?

  • Verify the rules in your state: Payday loans are governed by the laws of the respective states for which the loan originates. Some states put an interest cap on the loans to protect consumers from arbitrary interest rates. In case your lender does not abide by them, seek assistance from your state regulator.
  • Protection for military consumers: Payday loans offered to members of the military or their dependents are protected by a Federal Law and a Department of Defense rule. The interest cap for these members is 36%, and creditors may not require the use of a bank account for the loan. Also, if the creditors do not disclose the loan costs in entirety or violate the military protections, the credit agreements may be voided by the competent authority.
  • Ask for an extension: Do not take a second payday loan to repay the first one. It only ends up creating a debt trap. Instead, ask your creditor for an extension or make an arrangement to repay in installments. You can seek assistance from the state regulator for if your vendor refuses to cooperate. 
  • Control your finances: You can choose not to give your lender access to your paycheck account. If you have already provided access, you can decide to revoke the agreement by writing a letter to the lender. The lender can then access your account only with the court’s permission. 
  • Ask for help from a regulator: Make sure that your lender is licensed to provide bad credit payday loan. If you are unsure, solicit advice from a regulator. Regulators can help you in reaching an agreement with your lender and can also take legal action against unlicensed lenders. 
  • Protect your bank account: Do not write checks to accounts that have insufficient funds in order to repay your payday loan. You may have to close an account (with advice from a banker) and get a new one to make sure that your account is not overdrawn. Also, remember that a lender can file a civil but not a criminal case on a bad check. 
  • Know the rules before you stop check payments: Some states allow lenders to take criminal action against borrowers who stop payment on their checks. Some states may also initiate criminal action against borrowers who close their accounts before the loan is due or if a check bounces. Make sure that you know all the state specific rules before you take any actions regarding your
  • Choose secure loaning companies online: Online lending might pose security and privacy risks. Online vendors, irrespective of their physical location, are subject to the state’s credit regulation laws. Contact a state regulator to file complaints or get legal assistance. 
  • Know your rights as a consumer: As a consumer, you have legal rights when contacted by debt collectors. You have the right to request debt collectors to stop contacting you for repayments. However, this does not excuse the debt, and the collectors have a right to file a lawsuit for recovering their money.

Be wary of fraudulent collectors who demand immediate payment, threaten arrest for non-payment, or try collecting money you do not owe. Legitimate collectors will send out a ‘validation notice’ within five days of the first contact, stating how consumers can get more information about the debt.


While payday loans can rescue consumers in dire financial circumstances, one must ensure the legality of the lender and know the state laws and the rights they afford. Any agreement that stays within the legal boundaries is beneficial to both the parties and in the case of a breach, each can exercise his own rights and seek legal counsel.