Key Takeaways

Payday lenders use ACH authorization to collect repayments from your bank account automatically. While this is convenient for the lender and borrowers, there are several ways to block payments.

Before borrowing it, is important to know how do a payday loan work and the costs involved on it so you know what you’re getting into. You should also know that some lenders may be skirting the law by operating offshore or lending through a state with loose lending laws.

If you have taken a payday out, you may have agreed to automatic withdrawals of payments. Borrowers have a right to stop these withdrawals if they don’t have money to make the repayments. There are several different ways to achieve this legally, as we’ve listed below.

Why You Should Block Payday Loans from Debiting Your Account

One in five people that borrow a payday loan defaults on their payments. Repayments through automatic ACH payments carry significant risks. You can incur charges such as overdraft fees if you don’t have money in your bank account when a payment is processed. The bank may reject your payment, and late fees can be added to your outstanding balance.

Risks of Automatic Payday Loan Withdrawals

Payday loans come with astronomically high-interest rates, often as high as 200%-500%. These APRs are much higher when compared to traditional lenders. Another risk you may face is unauthorized debits from your bank using the information you provide to a payday lender. 32% of borrowers complain about unauthorized withdrawals in connection to an online payday loan. In many cases, payday lenders may deduct additional payments or fees from your accounts without permission or notice.

How to Block Payday Loans from Debiting Your Account

As a borrower, you have the authority under federal law to stop automatic payments on payday loans at any time, even if you have already provided them permission to do so. The four main ways to stop payday loans from automatically withdrawing money from your account are laid out below.

1. Revoke ACH Authorization for Payday Loans

To cancel payday loan automatic withdrawals, you’ll have to take a look at your agreement to find the portion that allows the lender to withdraw the payments. Typically, this can be found in the promissory note and will be titled "ACH Authorization or Automated Clearing House Debit and Credit Authorization Agreement.” This section will describe how to stop payday loans.

Follow the instructions mentioned in the agreement to stop the withdrawals. The ACH Authorization will typically have a deadline before which you need to notify the payday lender to stop the withdrawal. Send a letter with your name, address, account number, and date to the lender by certified mail. Keep a copy of the receipt. The CFPB offers a sample letter you can use.  

2. Contact Your Bank or Credit Union

Once you revoke authorization, the lender will no longer be authorized to withdraw any payments from your bank account. It’s still recommended that you inform your bank or credit union that the lender does not have the authorization to debit your account. Send a copy of the letter you sent to the lender along with the details. Sometimes, your bank may have an online form you must fill out and submit to do this.

3. Close Your Bank Account

Consider closing your bank account as a last resort to stop payday loans. In most cases, notifying your lender and bank will be enough to block payday loans from debiting your account. You will only need to close your account if your lender doesn’t respond to your notification to stop withdrawals or if you can’t afford the fee to stop payment. Talk to your bank to see if there is an alternative available.

4. Put a Stop Payment on Payday Loan Automatic Withdrawals

Even if you have not revoked authorization, you can still put a stop payment on the withdrawal. Contact your bank or credit union and provide them with a stop-payment order. This order must be submitted at least three business days before the scheduled payday loan payments. A fee will be charged by your bank for a stop-payment order.

The two main legal ways to stop payday loans from debiting your account are through a stop-payment order or by revoking authorization for the automatic debits. It is important to remember that revoking authorization will not cancel your debt. The lender can still sell your payday loan debt to a collections agency or pursue legal action if you do not make payments. The unpaid debt will also be reported to the credit bureaus, and this can impact your credit score negatively.

File a Complaint with the CFPB

After you stop payments or revoke authorization, continue to monitor your checking account. You can file a complaint with the CFPB in case of unauthorized payments or if:

  • The ACH Authorization does not mention how to revoke debit authorization.
  • The payment was not stopped by the bank even after requesting it.
  • Banks allow withdrawal even after notifying you that you revoked the authorization.
  • The lender does not stop withdrawals even after you notify them.

The Consumer Financial Protection Bureau can help you resolve the complaint. You can also contact your state attorney general or state regulator.

Seek Legal Assistance

Even if you revoke the authorization, it is important to remember that you are liable to pay the outstanding debt. If you stop making payments to the lender, it will damage your credit score, and there can be a lawsuit. Consider getting in touch with a lawyer and seeking advice on how to protect yourself legally. Another good alternative is to negotiate a debt settlement with your lender to pay off the debt.

Alternative Options to Payday Loans

Payday loans may provide you access to funds quickly and effortlessly, but they should be avoided because of the exorbitant interest rates. The shorter term makes it even more difficult for you to pay off the loan. When in need of funds for unexpected expenses, consider these alternatives.

Emergency Savings Fund

The ideal way to deal with unexpected expenses is by paying for them upfront from your savings. Having an emergency savings fund will help you avoid the need to use credit cards or expensive loans. Once you are debt-free, consider starting an emergency savings fund. Aim to save an amount worth two or three months of expenses.

Credit Counseling Services

Credit counseling services offered by nonprofit and for-profit agencies can help you get out of debt. Your credit counselor can take a comprehensive look at your expenses, income, credit report, budget, and debts to come up with a feasible plan to tackle debt.

Credit counseling agencies can also negotiate with your lenders on your behalf to reduce interest rates or eliminate late payment fees and charges. They can also enroll you into a debt management program, through which you can pay off your debts at a minimal fee. You’ll have a structured payment plan, which makes it easier to stay disciplined.

Personal Loans

A personal loan is a form of unsecured debt. Banks, credit unions, and other financial institutions can offer you these installment loans to cover large expenses such as home repairs, car repairs, or anything else. Compared to payday loans, personal loans have longer terms, lower interest rates, and lower monthly payments. If you have a good credit score, you may be able to qualify for a personal loan.

Conclusion to Blocking Payday Loan Automatic Withdrawals

Automatic withdrawals can prove to be expensive when you don’t have enough funds in your account, and the fees start adding up. It is important to avoid this situation by stopping automatic payday loan debits immediately. If the withdrawals don’t stop even after that, you still have protections as a borrower.

If you have already taken out a payday loan and are finding it challenging to repay it, contact TurboDebt for a free consultation. Our team will offer you a personalized debt relief option based on your individual needs.