What Happens When You Can’t Afford to Repay Your Payday Loan?

We’ve all been in a tight spot financially at least once in our lives, then spotted big signs on the side of the road that emblazoned “Easy Money!” and “Fast Cash!” So, if you fell into temptation and borrowed a payday loan (or multiple) that you can’t pay back, interest and fees piling up aren’t the only concern. Here’s what happens:

What Happens if You Close Your Bank Account and Default on a Payday Loan?

Unfortunately, even if going into default is unintentional, they don’t care, and you’ll be responsible for the compounding interest and late fees.

Most of these payday lenders require you to set up a direct payment to them in the form of an ACH (automated clearing house) payment. They will send you your loan via this method and deduct it from your account on your next payday using this method as well. It is used for paying bills or direct deposits from your employer, social security or unemployment checks.

It’s relatively simple to set up but a bit more complicated to get out of. To set up, you fill out an ACH authorization form with the lender that permits them to debit your account bi-weekly or monthly for a specific amount. Some unscrupulous lenders will also deduct unnecessary fees in addition to the agreed-upon payments (plus sell your information and expose your private information to third parties).

You will want to notify both your bank and the payday lender that you will revoke their authorization or permission to debit your account. Do all this in writing, make a quick courtesy call to both, and save a copy of the letter to both parties. Send this by certified mail to make sure both the payday lender and financial institution have seen it. This revocation letter should be at the bank no later than three days before the payment date.

Last but not least, monitor your bank account for movement. Dispute the unauthorized transaction if necessary.

Do You Need Payday Relief?

Get lower payments and interest rates with a payday loan consolidation program.

First: Interest and Fees Pile Up

Payday lenders and other types of predatory lenders target the most vulnerable, charge exorbitant fees and lend out loans with 396% interest rates or more. On average, payday lenders pay $520 in fees to borrow $375. Depending on how your loan is structured, interest and fees will continue to accrue after you’ve defaulted.

This means that defaulting on these loans can be extremely expensive, we encourage you to do the math for yourself if you have borrowed from or are considering borrowing from a payday lender. If you can’t, then try using a calculator site to help you.

Keep in mind that this only calculates the interest and not the hidden fees written in the fine print. Read your contract to discover any hidden fees.

Aggressive Collection Calls and Threats

If you think these payday lenders are the lowest of the low, wait till you start hearing from the mercenaries they hired to attempt to collect from you after they haven’t received any money from you in about 60 days. These debt collectors may threaten you about jail time but don’t fall for this. You cannot be arrested. The Fair Debt Collections Practice Act (FCDPA) bars collections agencies from threatening jail time, but the threats are still fairly common. Borrowers who are threatened with arrest can report the threat to their state attorney general’s office and their state’s bank regulator.

The Consumer Financial Protection Bureau (CFPB) also offers you some protection. Submit a complaint to the CFPB if this happens to you.

Credit Score Damage

Your credit score is your purchasing power. Just like if you don’t pay your mortgage, credit card bill or phone bill, any non-payment goes to a collection agency. Your credit score will take a direct him for this. This blemish stays on your credit report for up to seven years, and you can have a hard time securing a loan in the future.

Court Summons

If you think you’re smarter than they are, think again. Do not ignore the court summons. Many lenders win in court simply because the borrower doesn’t show up. If they win, the court may order the debt to be collected from the borrower in a few ways:

  • Wage garnishment: The court may order employers to withhold money from the your paycheck for debt repayment.
  • Property lien: The creditor can claim your property. If you sell the property, you’re legally obligated to pay off their debt with the proceeds.
  • Seizing property: In some cases, the court may order the seizure of a piece of your property.

This is where jail time becomes a threat. If you fail to follow court orders, you may wind up in prison.

What are Some Options if You Can’t Pay Your Payday Loan?

This may be a good time to borrow from a pessimist; he or she won’t expect it back. Kidding aside, you will want to negotiate with your lender, try to get a less expensive loan or borrow from a friend or family member. You can also seek out community assistance programs by checking out your local government sites, consider debt consolidation or work with a credit counselor.

Check Your State’s Laws for Options

Check whether your lender is a Community Financial Services Association of America (CFSA) member. The CFSA requires its members to offer Extended Payment Plans (EPP). These payment plans force lenders to give borrowers monthly payment plans without rollovers. File a complaint if a CFSA member doesn’t off you an Extended Payment Plan.

If the lender isn’t a CFSA member, check your state’s laws. Several states make all payday lenders offer EPPs. Others ban or restrict rollovers. Some have even outlawed payday loans entirely.

Seek Out Community Assistance Programs

Food, shelter and other needs come first. Borrowers can seek out community assistance programs to help them cover the basics.

Work with a Nonprofit Credit Counselor

Nonprofit credit counselors offer the public free, or very cheap, financial advice. They help borrowers improve their money management skills and avoid bankruptcy while dealing with their debt by setting up a debt management plan.

They can also offer advice on approaching negotiations with lenders. However, they may not be able to negotiate on the borrower’s behalf — payday lenders often refuse to work with credit counselors.

Also, borrowers should watch out for scams. Like payday lenders, credit counseling scammers prey on the financially vulnerable.

Take Out a Debt Consolidation Loan

Borrowers can use debt consolidation loans to pay off high-interest debt and simplify their payments. 

Trading debt for debt isn’t ideal, but a debt consolidation loan can help break free of the cycle of payday loan rollovers. 

How to Rebuild Credit after Defaulting on a Payday Loan

Pull copies of your credit reports from all three major credit bureaus — Experian, Equifax and TransUnion. All lenders look at the three credit reporting companies to assess your viability as a borrower. From this report, you will see where credit score improvements can be made. Everyone is entitled to free copies of their credit reports at www.annualcreditreport.com

Paying your bills on time, staying current on all your payments, checking for errors on your credit report and fixing any mistakes you find will help boost your credit score.

The credit utilization ratio is another aspect of your score makeup. It is your total debt divided by your total available credit. This score makes up 30% of your total score. A credit utilization rate below 30% is ideal. So any credit card that is maxed out or close to being maxed out will lower your credit scores.

Other ways to rebuild credit are:

How to Avoid Payday Loan Debt

Payday loans should not be on your radar unless there is simply no other option. There are many other ways to make up the shortfall or bring you closer to positive territory.

Gig work

According to the International Labor Organization (ILO), as many as 55 million people in the United States — or 34% of the workforce — were gig workers in 2017. Furthermore, the total was projected to rise to 43% in 2020. Driving for Uber, delivering for Postmates, looking for jobs on Fiverr or Upwork and numerous other remote or part-time job boards are great ways to put those additional skills to work.

Sell your Unused Items

One man’s trash is another man’s treasure. Sell items you no longer need on eBay, Facebook Marketplace, OfferUp, Craigslist or the like. But be safe: If you’re selling locally, require a deposit or advance payment through Venmo, CashApp or Paypal, set up a public location to exchange your items or ask a friend to visit whenever someone is visiting your home to take a look at something you’re selling.

Consult a Credit Union for a Payday Alternative Loan

If you have a relationship with your local credit union, you can ask them about Payday Alternative Loans (PALs) or other options. Credit union PALs and other personal loans sometimes offer lower interest rates than banks, which could make them a good choice.

Borrow from Friends or Family

This can be an awkward conversation, but sometimes asking for a favor can be the boost you need to turn your finances around. Before borrowing from a friend, decide how much you value the friendship. There could be some pretty hard feelings if you end up unable to repay them. Family is generally stuck with you and will usually be more tolerant, but there are some high risks to consider — especially if they feel you’ve taken advantage of their generosity. Put it in writing so you’re accountable for repayment.

Peer-to-Peer Lending

Peer-to-peer lending is another option. These lending websites connect borrowers directly to lenders or investors, and are also known as crowdfunding. You tell potential lenders how you would spend the money and why lending you the money is a reasonable risk.

Bad-Credit Loans

Applying for a bad-credit loan is another option. These loans are for people with low or no credit scores. It is secured against a car, gold, jewelry, property or stock certificate. A pawn shop service is also an example of a secured loan.

Cash Advance Apps

Cash advance apps (also called paycheck advance apps) — such as Chime, Earnin and MoneyLion — are another way for users to borrow a percentage of their expected earnings for a small fee and repay it on their next payday. The maximum amount for most of these apps is a couple of hundred dollars and the fees charged by the lender are nowhere near as high as what a payday loan would cost. Just be careful not to overuse them.

FAQs

Can a Payday Loan Company Sue Me?

There is a chance a payday lender or collection company can take you to court. It can lead to liens against your property or wage garnishment.

Can I Go to Jail for Not Repaying My Payday Loan?

No. Notify your local attorney general’s office. It’s illegal for them to threaten you with jail or arrest.

How Long Does an Unpaid Payday Loan Stay on my Credit Report?

Seven years.

Can I Make a Partial Payment on my Payday Loan?

Yes, but you’ll have to pay late payment fees and your credit score will almost certainly take a hit. Contact your lender beforehand to determine what penalties will be levied and try to make arrangements to raise some quick cash — for example, drive for Uber.

What if I Change My Mind After Taking Out a Payday Loan?

You have until the close of business the day after you took out the loan to repay the amount in full without paying any fees. Or you can cancel the loan before you sign the paperwork and the funds haven’t hit your bank account.

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