Short answer: an arbitration clause says that a dispute with the lender goes to a private arbitrator instead of a court. Most also say you cannot bring or join a class action. Federal law makes written arbitration agreements enforceable (9 U.S.C. 2), so the clause usually binds you once you sign, unless the contract lets you opt out and you do it in time. Covered service members and their dependents are the main exception: for them, the Military Lending Act bans required arbitration.
What these clauses usually say
The CFPB studied arbitration clauses in credit card, checking account, prepaid card, storefront payday loan, private student loan and mobile phone billing contracts. It found (CFPB 2015 study):
- Nearly all clauses say arbitration may not proceed on a class basis: 85 to 100 percent of clauses in each market. Some also waive class actions in court outright.
- Most clauses with a class action ban add that if the ban is struck down, the whole arbitration clause falls with it.
- Most clauses let you, or both sides, sue in small claims court instead.
- The American Arbitration Association (AAA) was the main arbitration provider, and most clauses capped the consumer's upfront arbitration costs at or below the AAA limits.
The study did not sample personal installment loan contracts, so read your own. Look for a section called "Arbitration", "Dispute Resolution" or "Waiver of Jury Trial". The rest of the contract is explained in our guide to reading a loan disclosure.
What you give up, and what the study found
- Going to court with a jury, and joining a class action with other borrowers who have the same problem.
- Most people do not know. In the CFPB survey, consumers whose card agreements had arbitration clauses mostly did not know whether they could sue, or wrongly believed they could, and most wrongly believed they could join a class action.
- Few cases are filed. From 2010 to 2012, an average of 616 AAA cases a year were filed across six consumer finance markets combined.
- Of 341 cases filed in 2010 and 2011 that an arbitrator decided with a known result, consumers got relief on their own claims in 32. Of 244 company claims decided with a known result, companies won relief in 227.
- Consumers who paid arbitrator fees paid an average of $206 and a median of $125.
All figures above are from the CFPB study (CFPB). The CFPB later issued a rule to limit class action bans in arbitration clauses, but Congress disapproved it in 2017 and it has no force or effect (Public Law 115-74).
Opt-out windows
Some clauses let you reject arbitration within a set time. In the CFPB sample, 83.3 percent of private student loan clauses, 50.7 percent of storefront payday loan clauses and 27.3 percent of credit card clauses had an opt-out. The window was generally 30 or 60 days, counted from when the account was opened, the loan was funded or the application was sent. None was longer than 60 days, and the shortest was 3 days. Opting out usually meant mailing a signed letter; one payday lender required certified mail postmarked within 7 days of signing (CFPB).
Example dates, counted in calendar days from signing (your contract may count from funding instead). January 1 is a holiday with no mail, so in a case like this send early:
| If you sign on | A 7 day window ends | A 30 day window ends | A 60 day window ends |
|---|---|---|---|
| Monday, November 2, 2026 | Monday, November 9, 2026 | Wednesday, December 2, 2026 | Friday, January 1, 2027 |
- Read the clause the day you get the contract and note the deadline and how notice must be sent.
- Send the opt-out exactly as the clause says, with your name, account or loan number and a clear statement that you reject arbitration.
- Use a method that gives you proof of the date, such as certified mail, and keep a copy.
- Check what the clause says opting out does, if anything, to the rest of the loan.
Military Lending Act: arbitration is banned
For consumer credit covered by the Military Lending Act, a lender may not require a covered borrower to submit to arbitration (32 CFR 232.8(c)), and no agreement to arbitrate a consumer credit dispute can be enforced against a covered member or dependent, or someone who was one when the agreement was made (10 U.S.C. 987(f)(4)). Who is covered, and the rest of the law, are in our Military Lending Act guide.
If you have a dispute
An arbitration clause covers lawsuits. It does not stop you from complaining to a regulator; see how to file a loan complaint. If the amount is small, check whether the clause lets you use small claims court. For anything larger, a lawyer can tell you whether your clause is enforceable. This guide is general information, not legal advice.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.
Sources
- CFPB: Arbitration Study, Report to Congress (March 2015, PDF)
- 9 U.S.C. 2: validity and enforcement of written agreements to arbitrate
- Public Law 115-74 (November 1, 2017): Congress disapproves the CFPB arbitration agreements rule (PDF)
- eCFR: 32 CFR 232.8 Limitations
- 10 U.S.C. 987(f)(4): arbitration agreements not enforceable against covered service members and dependents