How Do Payday Loans Work Blog

Thank you for your answer, which brings up several new questions.

1. You say that “A debt relief company will step in and provide the person with a new loan, secured of course, and setup a new payment plan that they can pay back with greater ease.” But that is not what happens. No loan is given. A typical debt management company attempts to construct a repayment plan based on the voluntary terms that the creditor, in this case, the payday lender agrees to. The consumer then makes one payment to the debt management company and that is then divided among the creditors and sent out.

2. In my experience, rather than negotiate an affordable repayment amount which fits in with all the creditors the consumer is obligated to, payday lenders tend to take that check and use it to threaten consumers with legal action if they don’t pay. I’ve known people that have had the sheriff turn up on the door with a warrant for a bad check.

3. If troubled debtors only had one payday loan then it might be more manageable. But I typically see people with three, four, or five payday loans. There appears to be no payday industry regulation or limit on more than one payday loan for each consumer at one time. Because of that, and the lack of flexibility with debt repayment to payday lenders and the cumulative impact of owing multiple payday loans, it places many consumers in an unmanageable position when they are attempting to repay their debt through a debt management plan.

Very good comments, and I’d be happy to share more thoughts as well.

1. Some debt relief places I’ve seen won’t call it another loan, but often that is what is seems like because they are making payments to the debt relief company rather that all of their creditors. They negotiate with the lenders and reduce the amount, but are you saying that they don’t pay it off, rather just funnel money to them based on the new terms? Who is getting the credit for it and does it help the borrow?

2. It’s never a good thing to write a bad check, and thus the reason the payday lenders don’t like to negotiate a debt that they already have secured.

3. If a person does borrow from various sources then it would be much more difficult to pay back, similar to if a person had a bunch of credit cards, or high mortgage payments. From my understanding, many debt relief companies work up to a limit and don’t do car loans or mortgages, which often can be a bigger burden than a payday loan. I think if a person has taken out that many loans and is not able to pay them back, then a debt relief may not be the best thing for them and rather looking at a chapter 7.

Don’t get me wrong, I think debt relief is a great thing, but it has limits also. However, they are typically used for long term or traditional loans that have installment payments, and not payday loans that are not long term or have installment payments.

By the way, what is your name? It seems so impersonal responding to and Twittering with “admin”.

1. It’s not a loan at all and as some advertise “It’s not a loan, it’s a way out of debt.” There is no new credit created in a debt management plan. There is no liability created. It is a negotiated repayment plan and the debt management company simply provides an administrative function. I have certainly written about problems with debt management plans, especially in a down economy, but it can significantly help the borrower avoid bankruptcy if all of their creditors, including payday lenders, would agree to accept their pro-rata share of available funds each month. When creditors, like payday lenders fail to participate it only drives consumers needlessly into bankruptcy where nobody gets paid.
2. So if I read your comments correctly, you are saying that the check is used as a legal security to force the consumer to giving the payday lender priority leverage. In my interviews with payday lenders face-to-face they insist that when they have a check in hand they do not use that as leverage or pursue prosecution. So which is it?
3. Debt relief companies do not have a limit and while some may not include auto or mortgage debt, some will include all debts and make those payments on behalf of the debtor.

Steve

Thanks for sharing again, and I think this is certainly a good conversation to have and one that many people would probably find educational.

If a person is not getting an additional loan, how will that help them re-establish their credit or repair their credit, other than fixing the bad stuff that was wrong to begin with?

I think it would make sense to give them a new loan as they need to rebuild their credit, and there isn’t a way to do that without first securing credit and then making good on it.

In addition, it would make sense for people to be able to put all of their debt into a management package, but from what I’ve heard debt relief doesn’t cover all areas and won’t do auto loans or mortgages, which I think can be bigger burdens, but let me know if that is not right or not.

Also, I see some debt relief pitching themselves as credit rebuilding places and most of the time it seems like they are doing a new loan, but maybe that is only a few management companies or advertising practices of a few of them.

Lastly, most states do have laws in place to protect businesses against bad check writers, and some of the payday loan lenders will use these laws as a means to protect themselves and recover the funds that they put out. For example, I apply for credit card and get approved for a $1000. I run up that balance and then decide not to pay it back. What recourse does the credit card company have to collect their money, none. Knowing that they could stand to lose it all, they are happy to negotiate to get something. Whereas, a payday loan lender doesn’t give the money out unless they have a secured form collateral to collect the debt with. This means that if I take out a $1000 payday loan and decide not to pay it back, they have a way of collecting their money so they are not inclined to negotiate a lower amount than they already can collect. In addition, because writing a bad check is illegal, they have much more ground to stand on and can take legal action faster to get their money back, including calling local authorities. This is done in the most extreme cases, but they do have the legal right to do, whereas a credit card company can only make some phone calls and send letters to collect.

By the way, my name is Sal and have been blogging for over 3 years now for various industries, and blogging for financial services for about 6 months now. It’s nice to have a lively discussion with a real person, and one that I think will help others get the answers they need as well. Thanks for commenting and sharing your thoughts.

Sal,

Nice to meet you.

I don’t have any problem with any business following the letter of the law, including payday lenders. It seems disingenuous for lenders to say, when cornered, that they won’t use the legal recourse available to them. But more disturbing is the fact that the consumer is not clearly made aware that this check that they are writing might cause the sheriff to arrive on their doorstep when they can’t pay.

I’ve been to 15 or so random payday cash advance stores and just stood in the background and listened to the presentation. It might be in the fine print but people just seem to sign and go rather than read all the details.

Getting out of debt is actually a multi-phase process. There is no one stop way to get out of debt and improve your credit. People in terrible debt and those that most likely frequent cash advance stores will simply not get an unsecured loan to get out of debt.

A debt management company might be able to get you a repayment plan that your major creditors accept, but it will have a negative impact on your credit report and credit score because of what your creditors might report. It falls into the “no pain, no gain” bucket. It does not rebuild your credit. That is a separate process done latter.

Debt management ads generally fall into a few different groups. Most of them are for a credit counseling agency, the next smaller group are by bankruptcy attorneys that advertise bankruptcy as debt consolidation, and the last group would be mortgage companies, finance companies or lenders like Bank of America. I just wrote a huge post on their debt consolidation offer.

Now I have written positive articles about payday loans in the past when used under some very controlled and strict standards, but like many things in life, it can be easily abused. The difference is that if I eat too much junk food, I get fat, but if I write checks to cash advance stores I can’t pay, the sheriff shows up to meet me.

Steve

Although applying for loans is very hard, many companies are providing good services to the people just to pay back the money. The loan can only be a good way for seeking opportunities and fulfilling the desires but it will become a frustration if the borrower will not pay the money in time.