If you’re stuck in the payday loan debt trap, it may feel like you don’t have any options. What happens if you don’t have the money to repay your payday loan on the due date? Can you get an extension?
What Can I Do If I Can’t Repay My Payday Loan?
Payday lenders are fully aware that their loans are very difficult to repay once your next paycheck rolls around. In fact, payday loans have such a poor reputation that there are many state laws in place prohibiting them or restricting the rates and fees lenders can charge.
If you’re stuck and can’t repay your loan, you have a few options. They can include rolling the loan over into a new loan, or asking your lender for an extension.
The Consumer Financial Protection Bureau points out that there is no set definition for a payday loan, which means you’ll need to look to your lender to determine exactly when the full repayment for the loan is due. In most cases, however, payday loans are due when a person receives their next paycheck. If borrowing from a different source, such as Social Security, you could have as many as four weeks to pay back the loan.
Pro tip: If you can’t repay your payday loan when it’s due, it’s important that you address this before the loan is passed off to a debt collector. Though there are federal laws protecting you from abusive debt collection practices, once any debt is handed over to collections it will jeopardize your credit score and hurt your eligibility for other types of loans.
READ MORE: Can a payday lender sue you?
Weighing the Options: Rolling Over a Payday Loan vs. Getting an Extension
Depending on the state in which you live and the policies put in place by your lender, you may have the option of rolling over your payday loan or getting an extension. It’s important to note that the two options are not the same thing.
- Rollover: With a payday loan rollover, the borrower is required to pay an upfront fee for additional time to come up with the total payment. The lender may change the terms of the loan at this time, which includes increasing the interest rate. The borrower will be required to sign a new loan agreement, as the old loan is now rolled into the new one.
- Extension: With an extension, the borrower is simply granted additional time to repay the original payday loan under the original loan agreement’s terms and conditions. You may be asked to sign an amendment that includes the new payment due date.
Pro tip: If you’re eligible for an extension, this will almost always be a better alternative than rolling over your loan into a new loan.
READ MORE: Can a payday lender garnish wages?
Can You Get an Extension Without Paying Penalty Fees?
If a payday loan lender is reputable, there’s a good chance they are a member of the Community Financial Services Association of America (CFSA). This organization requires its members to allow borrowers to request one payday loan extension every 12 months at no additional cost. The extended payment plan (EPP) will be approved, no matter what the reason is for your inability to pay.
Pro tip: Consumers should take the time to read the CFSA’s Customer Bill or Rights before requesting an EPP. The company recommends contacting your lender the business day before the loan is due to request the EPP, as an amendment will need to be signed. The agreement will spell out the repayment plan and will list any consequences should you default on the loan. For example, you may be required to pay a fee if you miss one of the payment due dates. The balance of your payment may also be accelerated.
Beware of Fees and Hidden Costs When Rolling Over a Loan
Although there are no hidden costs associated with a payday loan rollover that is conducted through a reputable lender, there are fees you’ll have to pay when you agree to this type of loan. Depending on the lender, you may have to pay a set fee for the rollover, which still includes your principal and ongoing interest charges, or you may have to pay a set fee plus a higher interest rate. All of the fees should be clearly spelled out in your rollover contract.
READ MORE: How to get out of payday loan debt for good
How Payday Loans Work
Payday lending uses small loans with high interest rates to help borrowers bridge the gap until their next paycheck. The short repayment period makes the loans — which are also sometimes called paycheck advance loans — difficult to repay on time, and when it comes time to debit the loan from your bank account, the money just isn’t there, which can lead to overdraft fees. Despite the small loan amounts, borrowers quickly become trapped by payday loan debt as the additional fees add up.
Why You Should Avoid Rolling Over a Payday Loan
There’s a good reason why many states ban payday loan rollovers and why others put strict limits on them. The Federal Reserve Bank of St. Louis reported that the average payday loan interest rate is 391%. That means if you took out a $400 payday loan, you’d pay a $60 fee. Since most payday loans are due on your next payday, you’ll owe $460 within just a week’s time. If you roll that payday loan over, you’ll incur at least another $60 fee (some lenders may charge even more than this). Now your total amount due is $520. Most likely, that amount is again due on your next payday.
Rolling over a payday loan keeps you in a cycle of debt that continues to accumulate. Within just a month or two, you’ll begin to find this cycle has become impossible to break.
Ways to Avoid Rolling Over a Payday Loan
Fortunately, there are better alternatives to rolling over a payday loan when you need extra cash.
- Get a Payday Alternative Loan: These are available through many credit unions.
- Use a credit card cash advance: The average interest rate for a credit card cash advance is 22.53%, which way more affordable than 391%.
- Personal loans require you to prove that you can repay the loan; however, if you do qualify for one, you’ll find their interest rates are often quite low. Bankrate lists the average personal loan interest rate as of January 2023 as 10.56%.
- Ask for a paycheck advance: Instead of taking out a payday loan, you can go directly to your company’s Human Resources department and request a paycheck advance. The company may authorize the advance without any interest fees, although some businesses charge a small interest fee for the service. Some companies like DailyPay now work directly with employers to offer immediate access to their earned wages.
- Try a cash advance app: Don’t want to have an awkward talk with HR? There are plenty of online cash advance apps that offer loans that are very similar to payday loans — small, short-term loans you repay with your next paycheck — but many of those lenders don’t charge interest. Instead, they ask borrowers to leave a “tip” for the service. Some also charge a small monthly subscription fee.
- Borrow from a friend or family member: While it may be difficult to gather up enough courage to ask a friend or family member for a loan, it won’t cost you as much as a payday loan. Friends and family are also more likely not to charge interest or give you a quick repayment deadline like you’d get with a payday loan.
- Apply for a balance transfer credit card: If you have a good credit score, these offers allow you to transfer money onto your new credit card and pay no interest for a set period of time, usually averaging between 12-18 months.
- Take advantage of credit counseling: A nonprofit credit counseling agency can help you get your finances back on track by setting you up with a Debt Management Plan.
To learn how one woman escaped the payday loan trap, check out this report from NBC News.
The Bottom Line
It’s possible to get an extension on a payday loan, but it’s not recommended unless your state offers an opportunity to extend without a financial penalty. And rolling over the initial loan into a new loan might sound like a good option, but it is not. You’ve already paid a high price for the original loan. Before you extend or consider a new loan, make sure you’ve exhausted all other options first. You don’t want to get stuck in a debt cycle.
If you ignore a debt collector, It’s likely you’ll get a court summons because they’ll file a collections lawsuit against you in court. If they win through a default judgment, you could end up having your wages garnished. If you fail to appear in court, you could even end up in jail.
Don’t offer any personal or financial information, and don’t admit the debt is yours. Ask for a debt validation letter. Debt collectors will want certain information to confirm your identity and claim ownership of the debt. Tell them that you will only communicate with them in writing and through your attorney.
You will not go to jail for nonpayment of a debt. That’s a civil matter. If you do go to jail, it will be for a secondary reason, like violating a court order, neglecting to pay income taxes, or failing to appear in court.
The statute of limitations on debt in Texas is four years. Learn more about payday loans in Texas.