Personal loans are small amount, short-term loans given to individuals without requiring much documentary works and credit history verification checks to be paid back by the next payment or salary receiving date. These carry very high interest rates and people may not be able to pay these back on time. Roll-overs or extensions may lead to the never ending debt spiral. So, what options do the personal loans stores have to recover their money?
From legal perspective, cases of default in repayment of personal loan in USA are civil cases and therefore, these do not attract criminal punishment or penalties. The US has strict laws against the practice of predatory lending. personal loans having an APR rate of more than 36% are classified as predatory lending. Therefore, the companies offering these loans can recover their sums if they are charging a maximum APR of 36%. The courts have ordered garnishment of wages up to 40% of defaulter’s salary or wage but this leaves much to be desired. The companies may not be able to recover their sums out of the primary residence of the borrower or out of his retirement or child support incomes. It is only when the defaulter himself wants his property to be used to repay the loan that this option can be used.
However, generally, the companies avoid the recovery route through the courts. The litigation costs, limited penalties and punishments and the time consumed by the proceedings do not warrant taking recourse to this route. The companies sell instant personal loans default cases to the credit collection agencies who try to recover the same through the legally permissible and tenable means. These agencies send frequent reminders to the borrowers by way of letters, personal visits and calls. However, the law does not allow for the harassment of the borrower and may restrict the ways in which the payments can be taken by him or her.
The personal loans companies can, however, report the defaulter to the national credit bureaus which will make other lenders more cautious in dealing with him. This report remains with the bureaus for 10 years after which the names are removed. So, in effect, there is nothing much the credit companies can do except for making use of the collection agencies or reporting the defaulter to the credit bureaus. Court case is an open option but is preferably the last resort when the loan amount is big and other methods have failed.