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Will not repaying an illegal installment loan affect my credit?

A reader asks if she has to repay a lender that is unlicensed and is being sued for violating consumer protection laws

Summary

Only a small percentage of unlicensed lenders tend to sue borrowers for not repaying a loan, or report negative credit items.

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Will not repaying an unlicensed lender impact your credit score?

Reader Ann has a $2,749 installment loan that’s in collections as of last year. The lender is asking her to settle this loan by making an $85.93 payment each month for 32 months.

However, the lender does not have a license in Virginia and is being sued for violating consumer protection laws, which means the loan is likely illegal. Moreover, Ann is disabled and depends on Social Security to meet her expenses.

She is wondering if she should just advise the lender that the loan is “uncollectible” given her situation, or if she should just ignore its collection attempts. The loans are on her credit report, but not reported as in collections.

See related:  I’m buried in debt: Can I just stop making payments? 

It’s not a black and white solution

Ann, the answer to your predicament is not simple. You can’t avoid making payments without any impact to your credit score just because the lender is unlicensed.

James W. Speer, executive director at the Virginia Poverty Law Center, says that if you don’t repay your loan, the lender potentially could sue you. However, it seems a lot of unlicensed lenders tend not to sue. If they do end up suing you and winning a judgment against you, they have no way of recovering their money if you don’t have any assets they can seize. They certainly don’t have any claim on your social security income.

As for the credit implications, again, it appears only a small percentage of unlicensed lenders report your account information to the credit bureaus.

“It’s always true that if somebody puts something negative on your credit report, it can hurt your credit score,” Speer said. “You can challenge it, though.”

You could challenge the loan as illegal, and you may be able to get it off your credit report that way. Given the many horror stories consumers have of asking credit bureaus to heed their issues, that may not be an easy road to take.

If you are not able to get the loan off your credit report, you could even have a claim under the Fair Credit Reporting Act.

See related:  Could credit bureau reforms pass in the new Congress?

It all hinges on the outcome of the state’s lawsuit

Martin Lynch, director of education at Cambridge Credit Counseling, advises the consumer to continue making payments on the loan until the case is resolved.

“Though it sounds like something of a slam-dunk for the state, it’s not possible for me to guarantee that outcome,” he said in an e-mail.

As a prudent course of action, you might want to contact the lender’s collections department and see if you could negotiate a lower interest rate or monthly payment. A good plan would be to make the smallest possible acceptable payment until the case is settled, considering that the state could lose this case.

Lynch said that’s the advice he got from the attorney general’s office of another state. (The Virginia attorney general’s office likely would not comment on an open case.)

There could be a silver lining to this cloud.

“In the end, if the state wins the case, she might receive restitution as a victim of the unlicensed lender,” Lynch said. “If the state wins and the lender is found guilty, it should be possible to wipe those account entries from the credit report.”

See related:  CFPB sues credit repair firms over telemarketing, billing practices

Weigh the risks and benefits of not repaying

If you really are in dire straits and can’t afford to make any payment whatsoever, and can’t negotiate any debt management plan with this lender, you could avoid making payments. If you take this road, be prepared for your credit to take a hit. It may not affect you much right now if you are not looking for another loan or housing anytime soon, or need good credit for any reason whatsoever. But it may take time to rebuild your credit score should you need it later on.

Additionally, Speer suggests contacting the Virginia Poverty Law Center’s predatory loan hotline at (866) 830-4501 and talking to him for free legal advice on your specific situation.

“If it’s unlawful, you hate to see people pay back unlawful loans,” he said.

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