Payday loans are fast and high-interest loans that people commonly take out for sudden and emergency expenses that cannot be accommodated by their budget. People sometimes worry that taking out such a loan can lead to jail time if they default. Is this true? In this article, we’ll answer that question based on laws across various countries. Let’s start by defining what payday loans truly are.
What are Payday Loans?
There’s no set definition for a payday loan, but it’s generally a short-term, high-interest loan that you typically must pay on your next payday. The loans are generally for small amounts ($500 or less), and many states impose various limits on how much you can borrow.
Moreover, payday loans are usually paid off at once. Because of that, they have fixed interest rates. Many payday loan lenders don’t express charges as interests; rather, they charge fixed flat fees that can be between $10 to $30 per $100 borrowed.
Payday loans have a reputation for being highly risky; they have extremely high interest rates and don’t consider your ability to repay. At times, they have hidden provisions that pile up additional fees to the interest.
Payday Loans in the US
Can you be arrested if you don’t pay back a payday loan? The short answer is no, you cannot be arrested for defaulting on such a loan. Failure to repay a loan isn’t a criminal offense; it’s even illegal for lenders to threaten you with arrest or jail.
If you’re threatened with arrest for nonpayment of a payday loan, the Consumer Financial Protection Bureau’s advice is to contact your state attorney general’s office.
If the lender or a debt collections agency sues you or enters a court order against you, you shouldn’t ignore the order. Otherwise, a judge may issue a warrant for your arrest. Appear to the court and provide any information the authorities require. Consult an attorney before doing so.
Payday Loan in Canada
The same rules apply for payday loans in Canada: you can’t be arrested if you fail to pay, but you can be ordered to appear in court. Failure to do so can lead to your arrest.
Meanwhile, payday loan lenders usually use the court as a last resort. They’ll first try to reach you via call, messages, and emails. They may also use debt collections agencies to help them. In Canada, each province has its own laws when it comes to debt collectors. Many of them are designed to protect borrowers from harassment.
For instance, the Collection and Debt Settlement Services Act in Ontario states that a collections agency cannot threaten legal action in communication with you without the prior written authorization of the original creditor.
Moreover, the agencies cannot call you without snail mailing or emailing first. There’s also a six-day waiting period before they can call you to collect the debt. If you haven’t received any notice, the agency or collector must re-send it — they have to wait another six days after the notice is re-sent before demanding payment from you.
Other rules and laws are in place to further protect consumers from harassment. However, you should still be responsible for keeping open communication with the creditor recording any calls or communication between you. If you receive a court order, you’re also required to appear.
Payday Loan in the UK
The same chain of events takes place in the UK when it comes to payday loans. If you default on a loan, the lender may use a collections agency to collect the owed money. The agency then may take you to court to settle the debt, and non-appearance can result in jail time — though this is highly unlikely in the UK.
That’s because the Financial Conduct Authority has specific provisions that protect consumers from predatory lending practices. For instance, in 2014, the FCA confirmed its price cap rules for payday lenders:
- Cost cap of 0.8% per day: this applies to all interest and fees charged during the loan and refinancing. This ultimately lowers the cost for most borrowers of high-cost, short-term loans.
- Default fees capped at 15 euros: if you can’t pay on time, default charges can’t be greater than 15 euros. Interest on unpaid balances and default charges must not exceed the initial rate.
- Total cost cap 100%: you mustn’t have to pay back more in fees and interest than the amount you’ve borrowed. In other words, no borrowers should have to pay back more than twice what they borrowed.
Moreover, all valid payday loan lenders are regulated by the FCA, and they can reach out to you a set number of times throughout the days and weeks.
Payday Loans in Australia
Nearly the same rules apply to payday loans in Australia. You cannot go to jail for a defaulted payday loan, but the lender can take you to court to start the “enforcement proceedings” to recover the money you owe.
Under the credit law, payday loan lenders shouldn’t provide you with an unsuitable loan, or one that you can’t afford to pay and doesn’t meet your needs. They’re also not allowed to take any of your security or assets for the loan. Interest fee caps are also applicable.
Under Australian laws, you’re also entitled to accessing a free external dispute resolution, or the process by which debtors and creditors resolve disputes. You can file a complaint with the Ombudsman, which will facilitate negotiation between you and the lender/collection agency. They can also make recommendations if you and the creditor cannot agree.
About The Author: Michael is an aspiring lawyer who likes to spend his free time researching different topics of law, especially about what is legal and what is not. He enjoys reading articles, watching documentaries, and attending lectures to become more informed about the law. He hopes that one day he will be able to use this knowledge to help people in need. Michael also has a passion for writing which led him to pursue journalism as his minor in college.
Through his studies, he has learned how to write professionally with clarity and precision. He is currently writing a novel about the life of a young lawyer who fights for justice in a world that is filled with corruption. Michael hopes to use his skills in writing and researching to pursue a career as an attorney one day. In addition, he also volunteers at legal aid clinics to gain more experience. From this volunteering experience, he has been able to help people better understand their rights and the legal system.
Michael is a dedicated individual with a passion for law and writing, and these qualities make him an excellent candidate for any legal field. He is eager to use his skillset to prove himself as a lawyer in order to contribute in making the world a better place.
