Payday lenders are loan companies that issue short-term loans --- from within a couple days to several months --- at very high interest rates. Often, borrowers will not be required to have a good credit history or provide collateral. However, individuals taking out payday loans are typically required to agree to incur steep penalties in the event they fail to timely repay.
Fees and Interest Payments
An individual getting a payday loan is required to sign a contract outlining the loan terms. Typically, this will include clauses that allow payday loan lenders to charge late fees and perhaps raise the interest rate, as well as charge interest on the late fees.
Debt Collection
The company may attempt to collect directly from the debtor or hire a debt collection agency. Initially, the debt collector will merely make contact, usually via phone or mail, and give a reminder of the obligation to repay the loan, as well as the potential penalties from failing to pay.
Legal Action
If payment is not forthcoming, the lender may choose to take the debtor to court. If the company is awarded a legal judgment, it may attempt to garnish the debtor's wages or seize money from his bank accounts. While the debtor cannot go to jail for failure to repay, he can go for contempt of court if he fails to follow the judge's directives.
State Laws
Many states have laws prohibiting payday loan companies from charging excessive fees. Many also cap the interest rate that payday lenders charge clients and the amount of late fees. In addition, some states limit the amount of money a payday loan lender can lend to a customer or that a customer can owe to the lender at a single time.
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