Signing Away Legal Protections

Posted by on Jun 16, 2006 in Pitfalls

Signing Away Legal Protections

When you sign for a payday loan, you sign away significant legal protections.

Many payday loan contracts include clauses that try to keep you from filing a lawsuit in a court of law…

Did you read the fine print of your loan contract?

All disputes, claims or controversies… shall be resolved by binding arbitration by and under the Code of Procedure of the National Arbitration Forum…

The terms of most payday loan contracts state that disputes are handled by arbitration.

What does binding arbitration mean for you?

In the event of a dispute:

  • the lender selects arbitration service (service depends on lender for repeat business)
  • the arbitration rules are often written by lender
  • these rules demand secrecy about proceedings (lender misdeeds are hidden from public)
  • the rules limit the evidence you can present
  • you pay more for arbitration proceedings (than for public court proceedings)
  • if you lose, you cannot appeal (even if there were legal errors, you have no recourse)
  • if you refuse to participate in arbitration, you lose the dispute (with no further recourse)

Many such clauses are one-sided. You are bound by arbitration but the lender is not. The lender can still sue you in a court of law!

So when you signed on the dotted line, you:

  • signed away a significant portion of your paycheck
  • signed away protections provided under our legal system

Class action lawsuit? Most payday lenders include the following clause in the loan agreement:

To the extent permitted by law, you agree that you will not bring, join or participate in any class action as to any claim, dispute or controversy you may have against… (enter name of your favorite cash advance company)

Are these clauses enforceable?

On August 9th, 2006, the New Jersey Supreme Court ruled that:

  • the arbitration clause was enforceable, but;
  • the class action clause was not enforceable

Supreme Court Opinion Summary:

The provision in this consumer loan contract that forbids class-wide arbitration is unconscionable and thus unenforceable. The appropriate remedy is to sever the unconscionable provision and enforce the remaining valid portions of the arbitration agreement.

In other words, when you sign on the dotted line of a payday loan, you agree that any disputes with the lender will be handled by binding arbitration rather than a court of law putting you at a disadvantage. This is one of the pitfalls of payday loans.

Before applying for a payday loan, be sure to:

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