Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Aug 3, 2021

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While a simple phone call or visit to a bank or credit union is usually all it takes to close a bank account, doing so in order to avoid collections on a payday loan can result in some heavy consequences.

The exact process depends partly on the arrangements that led to these automatic payments. For example, if the payments are actually court ordered garnishments, the lender could take you back to court. The court could reestablish the garnishments and impose other fines.

What happens if there is no judgment, just a payment plan> Once a lender discovers that a borrower has closed their bank account they will probably take quick action.

People who borrowed a payday loan used to leave a personal check with their financer. While some still do with physical lending locations, it’s now more common for borrowers to give online lenders permission to debit money directly from their checking account. If an account is closed, the financer may try to cash a borrower’s check or debit money from the account electronically. This could cost the borrower overdraft fees or processing fees for the closed account. If you use that lender in any regular frequency, they would also refuse to lend anything further to you.

If undertaking any of these actions doesn’t work, the payday lenders can begin collection activities. Collection agencies typically use incessant phone calls to try to contact their targets. It is also possible they will try to sue borrowers in court. They would also add fees for the payment loan collectors.

What Should You Do If You Can’t Afford Payments for Your Payday Loan?

In order to avoid facing collection agencies or even having to close a bank account in the first place borrowers should try to negotiate with their lender. Explaining to their lender why they can’t pay back a payday loan might grant borrowers some mercy. It’s always possible a payday loan store manager could grant a borrower a deferment period or an installment plan for repaying the loan. It’s better for them than losing the money or paying a collections agency. Especially in temporary circumstances, they’re often more flexible than you might think.

Due to these reasons, closing a bank fund should not be a decision made quickly. In fact, opening another bank account can be difficult once a borrower closes a previous account since some banks refuse to open accounts for customers that owe money to another bank. If a payday financer has withdrawn so much money that a borrower has a negative balance, then a bank may even refuse to close the account until the balance is paid off.

In lieu of closing an account, borrowers can instead place a freeze on their account. A frozen account will accept deposits, such as paychecks, but will not permit any withdrawals. As a result, payday lenders will be unable to withdraw funds from a frozen account. Of course, a payday lender may still see this as a reason to take legal action or call a professional debt collector.

Borrowers could also put a “hard block” against a particular payday loan financer. Similar to freezing a fund, a “hard block” bars a specific business from making electronic withdrawals. In order to do this, a written letter is required to be sent to the lender informing them that they no longer have permission to make withdrawals. Naturally, this will upset financers who may charge a punitive fee for trying to block their withdrawal attempts. Additionally, banks may charge fees per each requested “hard block.”

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Why Do Experts Recommend Avoiding Short-Term Loans?

One of the best ways to avoid this type of situation is simple: don’t take out short-term loans. Once a professional debt collector gets involved, you could find yourself in a world of trouble. This is true whether they’re collecting for payday loan companies or student loans. 

The simple answer is to look for other avenues if you need help paying your bills each month. Reach out to friends or family for a short period of time. If you have bigger expenses, look into a personal loan with set monthly payments and a reasonable interest rate. Choose a reputable financial institution. 

Unfortunately, payday loans have a way of creating a vicious cycle of debt for many borrowers. Once you’re in debt with payday loan collectors, the interest and fees keep adding up every month you don’t pay the balance in full. With a little research and the right loan companies, you can maintain control of your finances without high interest loans.