When a person takes out a payday loan, he is legally required to pay back the money he took out, as well as any additional interest or fees charged to him. If he doesn't, the lender can take actions to collect on it. However, payday lenders in Kentucky actually have few options to collect, as they cannot sue a borrower for payment of the money in civil court.
Payday Loans
When a person takes out a payday loan, he must generally sign a contract with the lender in which he agrees to pay back the loan and agrees to pay any additional charge, such as late fees and interest. If the borrower violates this contract, then the lender can usually sue -- at least in most states. However, Kentucky prohibits payday lenders from suing borrowers for money that they don't pay back.
Kentucky Laws
In Kentucky, a lender is allowed to charge only up to 15 percent annual interest on a cash loan. So, for example, if a person takes out a payday loan of $400, the most money that a lender can charge the person in interest in a year is $60. This interest also includes all late fees on default. This makes payday lending an unprofitable business in Kentucky compared with other states.
Debt Collection
Although a lender cannot sue a borrower for the nonpayment of a loan in Kentucky, it can take other actions to collect on the debt. This includes contacting the borrower repeatedly and reminding her of her debt obligation. In addition, the lender can report this debt to a credit reporting agency, causing the person's credit rating to drop. This can place pressure on the borrower to pay, so as to improve her credit score.
Criminal Prosecution
A person who defaults on a payday loan cannot be prosecuted in Kentucky for failing to do so. In fact, all payday lenders are legally required to post a sign that states "No person who enters into a post-dated check or deferred deposit check transaction will be prosecuted or convicted." However, while a person cannot be prosecuted for defaulting on a payday loan, he may be prosecuted for other crimes. For example, the person may potentially be prosecuted for fraud if he provides false information when securing the loan.
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