Payday loans -- which typically carry high interest charges and must be paid back within a month -- are structured similar to other loans. A borrower is required to pay back the amount of the loan by an agreed-upon date, along with any interest and fees assessed by the company. If a borrower fails to pay this money back according to the payday loans terms, he will likely face financial penalties and potentially legal action.
Loan Terms
When a person signs a payday loan contract, he usually agrees to accept the assessment of a number of punitive fees in the event that he doesn't pay back a debt on time. These fees are often applied monthly. Within a single year, a person can end up owing several times as much as the size of the original in penalty fees. So, at the end of three years, the person may owe almost 10 times as much.
Collection
Depending on the policy of the payday loan company, the company may attempt to pursue collection of the debt for the entire three years that the debt is delinquent. In some cases, the company may sue the borrower in court. In other cases, the company may write off the debt as a business loss. In this case, the company will stop pursuing collection of the debt, but the debt will still exist and may be purchased by another party.
State Laws
All states have statutes of limitation on debts, meaning that debts cannot be collected after a certain period of time has elapsed. In some states, a debt that is older than three years cannot be legally collected. However, most have statutes that are longer than three years. Some states also have special payday loan laws that cap the amount of penalties or fees that can be applied to a delinquent loan.
Debt Collection Agencies
In some cases, rather than attempt to collect the debt themselves, payday loan companies will choose to sell the debt to bill collectors, also known as debt collection agencies. These creditors may purchase a debt that is several years old, often at a steeply discounted price, and pursue collection themselves. When this happens, a debt that the borrower believed dormant may reappear as the company takes steps to collect the money outstanding on the loan.
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