Although payday loans generally carry higher interest rates than other consumer loans, the rules that attend borrowing them are similar to the rules applied to other loans. A borrower who takes out a payday loan must pay the loan back in the amount and in the time period specified by the contract he signed when he took out the loan. Otherwise, he may face civil and, in rare cases, criminal penalties.
Payday Loan Contracts
All states have laws that guarantee the sanctity of business contracts. If a person fails to uphold his end of the contract, then the other party can seek damages. So long as the contract is written legally -- meaning it adheres to all state laws -- it is legally valid and the lender can collect the money owed him. However, if a payday loan contract is not valid -- say, for example, the interest rate charged by the lender is too high -- a judge may nullify it.
Civil Suits
If a contract is valid, then the lender can sue the borrower for his breach and attempt to collect the money owed on the contract with the aid of a judge. If the judge rules in favor of the lender, most states will allow the lender to petition a judge to garnish the borrower's wages or seize the borrower's bank account if the money is not forthcoming.
Hot Check Laws
Some states have so-called "hot check" laws designed to prosecute people for fraud if checks that they write do not clear. However, hot check laws can only be applied to individuals who knowingly and maliciously wrote a bad check. While a payday lender may wish to charge a borrower who writes her a bad check, prosecutors will not charge a borrower unless there is compelling evidence he wrote the check knowing that it wouldn't be paid.
Other Charges
Under U.S. law, a person will not go to jail for his failure to pay back a debt. However, he may go to jail for fraud or for crimes related to this failure to make good on a debt. For example, if a debtor fails to comply with an order of the judge hearing a civil case, the judge may find the debtor in contempt of court and sentence him to jail time.
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