What if I Close My Account Before My Payday Loan Is Due?

Payday loan companies pitch their services as a lifeline for struggling consumers, but unless the consumer is very careful with these financial products, they could end up making a bad situation worse. The interest on payday loans is substantially higher than other types of consumer credit. What's more, the payday loan companies require access to your checking account to ensure they'll get their money -- and if the account overdrafts, the debtor's problem gets worse. Some people elect to close their checking accounts to avoid the spiral, but this strategy is fraught with danger.

Payday Loan Process

A typical payday loan provides a consumer with an immediate cash payment -- usually between $100 and $1,000 -- in exchange for a lump-sum payment with interest automatically debited from the customer's checking account in one to four weeks. Most payday loans include a provision to make an interest-only payment, deferring the principal balance for three or four pay cycles for a "refinancing fee." Consumer's Union notes that "the interest rates for such transactions are staggering: 911 percent for a one-week loan; 456 percent for a two-week loan, 212 percent for a one-month loan."

Checking Account Access

Because the payday loan company requires either a personal check or electronic banking data before it will approve the loan, the consumer will face an automatic payment on the loan's due date irrespective of his account balance. Although some payday loan companies allow the customer to postpone or refinance an outstanding note, an interest payment will still be assessed. If the customer's bank balance cannot cover the outstanding payment, the payment may bounce or be paid and leaving the customer with a negative balance and fees from his bank.

Financial Effects of Closure

If a customer elects to close his bank account before a payday loan comes due, the payday loan company will still pursue collections. These companies often work with aggressive debt collectors to recover the outstanding balance. Sometimes the collector will even take a debtor to court, creating a civil judgment that affects the debtor's credit score and permits the collector to pursue wage garnishments or bank levies. Most outstanding payday loans, even if left uncollected, will linger on the consumer's credit report for a minimum of seven years, substantially lowering his overall credit rating.

Legal Effects of Closure

A payday loan is a loan with a loan contract. If a customer closes his bank account before an agreed-upon payment clears, then he is in default and is subject to civil complaints. In addition, in many states, issuing a check (or agreeing to an electronic debit) good for a certain date, then closing the account before that date, is considered fraud and could expose the customer to criminal penalties including prosecution for passing bad checks.