Q: I owe several payday loans and can no longer make the payments. Should I consolidate these loans with one of the debt consolidation companies? Or, should I just close my bank account and try to start over?
A: First, let’s deal with your question of closing your bank account to avoid paying the loans. It’s likely that when you took out the payday loans, you signed a contract that prevents you from closing your bank account. Either you gave the payday loan company a pre-dated check to deposit, or you gave the lender authority to make an automatic or ACH withdrawal from your account. In either case, if the lender submits the check or puts through the withdrawal and you have closed the account or don’t have enough money in it, you will still be charged whatever your bank charges for insufficient funds.
So, closing your account won’t resolve your issue. You will still owe the money, and you could rack up bank fees and penalty fees from the lender.
The best thing you should do is contact the payday lender to see if you can work out an extended payment plan. Find out if the lender is a member of the Community Financial Services Association of America (“CFSA”), which represents payday lenders. Under CFSA’s best practices guidelines, a borrower who cannot pay back a loan when it is due has the option of entering into an extended payment plan. This service allows the loan to be repaid over a period of additional weeks at no additional cost. However, if you default on the payment plan, the lender may charge a fee.
Some states have adopted laws that mandate a payday lender set up an extended payment plan.
As for getting a consolidation loan, you’ll still face fees, and even if the payments are lower, you end up paying more money by stretching out what you owe.
Try to work out an extended payment plan with the payday lender. And then, never get one of these loans again.