Many payday lenders find themselves in the position of having to collect on loans from borrowers who have defaulted on their payments. This can be a long, expensive process, one that is not always financially viable. However, because borrowers are legally obligated to pay back these debts, the lender has a number of laws that it can use to help it recover its money. These rights include the right to sue the borrower and to use legal collection methods.
Debt Contract
The rights that a lender has to collect on a payday loan is linked to the contract that the borrower signed when he took out of the loan. Most payday loans allow the lender to charge a certain amount of interest on the principal the borrower took out, as well as assess late fees if it's not paid back on time. This contract forms the legal basis for the lender to collect on the loan.
Debt Collection
If a person fails to pay what she owes the payday lender, the lender has the right to sue the borrower for breaching the contract that she signed to borrow the money. If it wins this case, the lender will have additional options to collect on the debt, including, in most states, the right to garnish the borrower's wages and seize money from her bank account -- with a judge's permission.
Statute of Limitations
A lender has the right to sue only before the statute of limitations has expired. Each state has its own statutes of limitations on how long a lender has to file suit for an unpaid debt. After this time has expired, the borrower still has a legal obligation to pay back the debt, but the lender no longer has the right to sue, making the debt essentially unenforceable.
Exceptions
One instance in which a lender may not have the right to collect on the loan is if the contract under which it issued the loan was not legal. Many states have laws that regulate the terms under which payday loans can be issued. For example, a state may cap the rate of interest that a lender can charge a borrower. If the contract violates state laws, then a judge may term it illegal and unenforceable.
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