Present Day Mafia – The Solutions
If you ever found yourself having to use these high interest rate lenders then I know you have experienced sticker shock. It is a tough decision to make, but when the needs outweigh the costs your choices are limited. If your credit keeps you from getting a credit card or a bank loan, these lenders of last resort may be your only option. If it is the only way to stop an eviction or a disconnection I can certainly understand the justification, life happens.
If life has happened to you and you are now the owner of one of these loans, what’s next? The best option is always to pay back the debt per the terms you agreed to. Whether you understood or “liked” the terms of the loan, you agreed to them and have signed a legally binding contract. How you pay it back will depend on what kind of high interest rate loan(s) you obtained and what you can really afford to do.
For this article I will classify the high interest lenders into two categories: Payday Lenders and Online Lenders. Payday lenders may lend over the internet but the debts are not paid over time, instead a single balloon payment is due by a specific date, and usually does not exceed $1000.00. Online Lenders are those that lend money that is to be paid back in installments over a term and usually are located outside of the U.S., like on Indian reservations. Both charge interest that can exceed 150% annually.
As stated the best option is to get out from under the debt as soon as possible or at least per the terms of the loan agreement.
For the Payday Lenders this means coming up with the money by the balloon date, which is usually two weeks, but no more than a month. Take the steps or do the things you should have done to avoid borrowing the money in the first place. Pick up overtime or side-work, sell items on E-bay or at consignment, ask for help from friends, family or church or turn off services you can no longer afford.
For Online Lenders the amounts borrowed are usually too high to pay off quickly, usually between $1000.00 and $5000.00. That doesn’t mean that you shouldn’t take the above steps to try and put extra money together to pay down the balance faster, just that the amount to repay is usually more than you can quickly accumulate. If the balance cannot be paid off within a month or two, look to refinance this kind of debt with a lender that charges a lower interest rate. Not that I ever like recommending borrowing money to pay off debt, as this usually only makes the hole deeper. By reducing the interest rate to at least a legally allowed interest rate you could save thousands of dollars over the term of repayment. First try your bank, then look for a local finance company, or you could even try to get a credit card and use the cash advance option to pay off the debt just make sure that the interest rate is significantly less than the amount charged by the Online Lender.
Paying the debt off as quickly as possible will cost you the least and will allow you to avoid the stress of this debt hanging over your head, and worse the added stress it will cause if you fall behind.
If repaying the debt as agreed is not possible then your options are limited and the costs go up.
The Payday Lenders will be happy to refinance your debt. When the 2 to 4 weeks are up, they will let you just pay the loan fee, usually $15 per $100 borrowed, and then carry the loan for another 2 weeks. This equates to a 400% annual interest rate. If you follow this option chances are you will be caught in an outrageously viscous cycle that on average lasts 6 months. The really sad part is this new loan fees further cuts into your already tight budget and you find yourself reaching out to another Payday lender for more temporary help. I have seen this nightmare grow to over 10 high interest lending places for one person.
For the Online Lenders there is no option to refinance, just more fees, in the form of late and NSF charges, from both the lender and your bank. Since the only way these lenders take payment is through ACH withdrawal, every time they try to process your payment, and the funds are not available it’s like bouncing a check. This will only make repayment harder and take longer.
If you decide to bury your head in the sand and hope that the debts just go away, you will find yourself stuck in a collections nightmare. On top of the fees stated above the collection activity will start. Phone calls at home and at work, to the point where you will dread hearing your phone ring. When you do answer the pressure for repayment will be extreme with a range of threats they will take if payment is not made. They have even been known to knock on your door to collect in person. This could be followed by lawsuits, judgments, garnishments, liens and levies. And of course, at least with the Online Lenders, interest is still accruing – the balance is still growing.
Now that I have sufficiently depressed you, let me tell you there are solutions to this nightmare but unfortunately none of them are easy. A Debt Coach has had our share of battles with these types of lenders. We know how they operate and the limits they are willing to go to collect.
For Payday Lenders the first step is to close the checking account that you authorized the withdrawals from. This is done to stop them from continuing to try and run payments which will only cost you more in fees. It’s OK to open a new checking account. Just don’t give the banking information out to third parties. Divide the balance by 6 to 9 installments, depending on what your budget can afford.
Then create a letter of explanation for repaying the debt. Start by explaining your situation and the reason why you need to make payments instead of paying the balance in full. Include in the letter the payment amounts you are going to make and the date you are going to make them. Also make sure to include the first payment, your account number and address and request that if they wish to communicate with you it is by mail only. Make a copy of the letter and first payment and mail it by certified mail, so you can show it was received.
Continue sending in installments each month until the balance is paid in full. If they send the payment back to you, don’t get discouraged just send them two payments the next month. If after the second month they again return the payment, which is highly unlikely, set up a savings account and deposit the money there, continuing to deposit the money, just don’t spend it. If they try to sue you before you can save the full amount this will show intent to any judge. Once you save the full amount send that in to resolve the debt.
If you are uncomfortable doing this or believe you need help setting up and maintaining the repayment plan we can help you. A Debt Coach deals with this situation daily. We have helped thousands of clients escape this nightmare. We have all the tools and the education you would need to resolve your high interest nightmare.
For Online Lenders, the options for resolution are not so straight forward. Due to their origination outside of the U.S., the legality of the loan, the high interest rate, and their potential impact on your credit, these debts just can’t be broken into equal installments and repaid. When you can’t repay as agreed, you will need to look into your individual states lending/borrowing laws.
I contacted the Attorney General’s office for the state of Kentucky to find out if they had experience with these types of debts. The answer I got was very clear: it is illegal to lend money to any Kentucky resident online, but enforcing the laws is a whole different situation.
In most cases, the online lenders locate their businesses on the Indian Reservation to avoid States Lending and Usury laws. The lender operates under sovereign tribal law, adding that Native American sovereignty predates the founding of the United States, is enshrined in the United States Constitution, and is further codified through federal statutes and hundreds of years of judicial precedent. Which is a nice way of saying, The Indian Reservations are not part of the United States and do not follow Federal and State regulations. Tribes located in impoverished and isolated areas need the proceeds from online lending to fund their governments and essential services — everything from education programs to new fire trucks. For some tribes online lending operations are now making up between 25 and 50 percent of the tribal budget. The chances of them going away, are very slim to none.
If you would like to read more about these types of loans please click Payday Lenders Are Using The Internet To Evade State Law.
If you have a loan from an Online Lender, contact your State Attorney General’s office Consumer’s Division to file a complaint. This will, most likely, not resolve the issue of repayment but legally this is all you can do at this time. The more complaints filed the better chance of future regulations, so others don’t fall into the same trap. Please take the time and do this.
As stated above the best way to deal with this debt is to pay if off as quickly as possible within the terms of the agreement. If the options discussed are not possible then in order to find a different legal option I recommend you speak with an attorney. If that is also not possible then here are some steps I recommend that you take to resolve this debt, but please understand this is not legal advice, only an opinion of one who has worked in this field for decades.
Same as with the Payday lenders, you must close the checking account down that you have authorized them to draft against. Every time your payment is due, the online lenders will try to run your payment through your bank. This will create NSF fees that you need to avoid.
Next check your state current usury laws, more information can be found at this link: State Usury Laws and Interest Rates. Find out the maximum interest legally allowed to be charge in your state. For Example, Kentucky maximum is 19% or 4% above the Federal Discount Rate, which is currently 4.75%. We are going to use the 19% (highest state rate) for payback of the online loan.
Next, using an Amortization Calculator figure out the new payment amount based upon what your state legally allows. This is what your repayment will be based upon. This, again, is not a legal way to resolve this debt. The lender does not have to agree to this, can still charge you the higher interest, and if they report to any of the credit reporting agencies it could negatively impact your credit standing. If you do not pay according to the terms of the contract you signed they could even sue you for the balance due, however this is very unlikely – especially in states like Kentucky which has laws they violated by lending to you. Check your state laws for online lending.
You may then ask, “Well why repay the debt at all if they can’t sue me?” As stated above I believe you should repay the money you borrow. If you wish to take that course, I would strongly advise that you speak with an attorney to understand the potential consequences if you do. If, however, you are like me and you feel you should at least repay the amount you borrowed plus reasonable interest, then follow these steps.
To help you understand what I am recommending lets create a hypothetical situation. For example let’s say that you borrowed $2,600.00 and agreed to pay it back over 48 months (4 years) at 179% interest. Your payment would be $388.32 a month and you will pay back a total of $16,039.55 over the term of the loan, 6 times the amount you borrowed – Ouch!
If you were in the state Kentucky, and you followed this advice, then you would write your letter to the Online Lender stating that you will agree to repay $3,731.52 at $77.74 a month over 48 months, which is at 19% – the highest interest rate allowed in Kentucky. If you can afford to pay more then I would recommend you do that, reducing the time and the cost of the debt. Play with the calculator until you come up with an amortization schedule that best fits your budget.
Once you have your repayment plan figured out draft your letter. Just like the Payday Lender letter include your situation and an explanation of what you are going to do. Include your account number and address and inform them you wish to communicate by mail only. Include your first payment, using a money order or cashier’s check, and send it certified (don’t forget to make copies).
The cost of certifying a letter is minimal and worth it, especially if more legal action is taken. You want a record of all your communications and actions and you don’t want to allow the lender the ability to deny receipt. The reason for money orders or certified funds is to give a payment as good as cash, without having to give them a check with your new banking information on it.
Follow through with your new payments arrangements. This is very important to comply with your new arrangements. This show intent to pay the loan back based on your state usury laws. Save all receipts from payments and communication. Keep this valuable information in case the online lender decides to sue you.
A Debt Coach can help you resolve this situation. Our counselors have decades of experience and all counseling is FREE. During a counseling session a certified counselor will listen to your situation, review your finances, and help you craft an action plan that will give you directions to follow to resolve the financial problems you are facing. If you are tired of the burden of debt, let A Debt Coach help you break free.
If you have any questions or concerns, please feel free to call A Debt Coach at 888-767-9155. All our advice is free and geared to help you succeed.