If Payday Loans are Illegal in Your State, Do You Still Have to Pay?

Payday loans are prohibited by law in 13 states/regions of the United States: Arizona, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, Washington DC, and West Virginia.  In spite of the law, it is still very easy to get a payday loan in these states.  Upon finding out that a payday loan is illegal in their state, the first thing that most borrowers want to know is if they still have to pay.

Illegal Payday Loans

If the payday loan was given illegally, you will still likely have to pay off at least the principle amount.  You could possibly get out of paying the principle amount too, but this will likely take legal action with the help of a lawyer.  In short, the costs (plus time and hassle) of getting out of the principle loan amount simply aren’t worth it.

When taking a payday loan at a storefront, you aren’t likely to run into legal issues.  However, the internet is a completely different realm – especially since many payday loans are given across state borders. It is wise to know your state laws on payday loans before taking any loan.  While you may not be responsible for interest, it can cause you a lot of hassle trying to get out of the loan.

Unregistered Lenders

Even if payday loans are permitted by law in your state, the payday loan may still be illegal because payday lenders must be registered.  If a lender is not registered, then you typically will just have to pay back the principle amount.  However, just like with the state-prohibited payday loans, it can be a major nuisance trying to get out of paying the interest.   Some states have set up laws to protect borrowers from illicit payday lenders.  For example, the Utah law HB459 was passed and gives borrowers the legal right to stop payments on payday loans if the lender is not operating under the law.

What to do if you have an illegal payday loan

If you find out post factum that payday loans are not permitted in your state or that your lender is unregistered, here are the steps you should take to protect yourself:

1. Go to your bank and speak with a manager about the situation.  Tell the manager that you want to revoke ACH (withdrawal) authorization from the lender. You will likely have to fill out paperwork reporting fraudulent activity.  For extra security, it is best to completely close your bank account and open a new one.

2. Send a letter/email to the payday lender saying these things: you have found out that payday loans are illegal in your state and/or that the lender is not registered; you have already paid off the principle on the loan and are taking about ACH authorization from them (in case you haven’t yet repaid the principle, inform the lender that you are willing to do so but on your own conditions); asking for an email confirmation that no more funds will be withdrawn from your account; ask for a refund of any interest you paid (the refund check should be sent to your address and do not cash it in your bank account because this will give them information about your new bank account!)

3. Send complaint reports to the Federal Trade Commission and the financial regulation committee in your state.