Sometimes it seems like a payday loan is all you need to solve your financial problems. But what happens when it’s time to repay the loan, but you can’t afford to repay it?
On average, 20% of payday loan borrowers can’t afford to repay the loans.
Here’s what to expect if you default on your payday loan.
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Can’t Afford to Repay Your Payday Loan? Here’s What Happens Next
You aren’t alone. More than 90% of payday loan borrowers regret their original payday loan. But there are a lot of potential ramifications:
You’ll Pay Extra Fees
Part of the payday loan application process requires you to give the lender permission to withdraw your balance from your bank account. Lenders may try to withdraw smaller amounts if the money isn’t there. Each failed attempt will trigger an overdraft fee.
Other payments may be declined, racking up even more fees.
And some payday lenders tack on a late fee for each late payment.
READ MORE: Payday loan interest rates
You May Be Offered an Extended Payment Plan
A payday loan extended payment plan allows you to repay your loan over a longer amount of time, in smaller increments. Whether an extended payment plan is available and whether it includes an additional fee depends on your state law and the payday lender’s policies.
Pro tip: Ask if your lender is a member of the Community Financial Services Association of America (CFSA). The CFSA requires its members to offer Extended Payment Plans. These payment plans require lenders to give borrowers monthly payment plans without rollovers. File a complaint if a CFSA member refuses to offer 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.
READ MORE: Payday loan extensions
You May Be Able to Renew or Roll Over Your Loan
For an additional fee, some payday lenders will give you the option to roll over your loan into a new loan. This means that repayment is delayed. Basically, you’re getting another payday loan to repay your first one. Though rollovers offer temporary relief, they increase the total amount you owe, which creates a cycle of debt that’s difficult to escape.
Here’s an example of how a rollover works:
Say you borrow $200 and the fee is $15 per $100, so a total loan of $230. If you can’t pay it back on your next payday and extend the loan for another two weeks, it will tack on another $30 to your balance ($15 for each $100 you borrow) and you’ll still your original loan amount of $230, so now you’re up to a loan balance of $260. Rollovers are designed to keep payday loan borrowers continuously in debt.
READ MORE: Can I have more than one payday loan?
You’ll Get Collection Calls
When you default on any loan, the lender will start calling you. You may get letters from lawyers, and your friends and relatives could also get calls from debt collectors who are trying to persuade you to repay. They may even threaten to send you to jail, particularly if the debt is sold to a collection agency..
However, federal law protects you from aggressive debt collection efforts. For example, if you tell a lender that you aren’t allowed to take personal calls at work, the collectors won’t be allowed to contact you during those hours.
READ MORE: How to deal with debt collectors
What to do if a Debt Collector Threatens You With Jail Time
Jail threats are scary, but it’s important to know that it is illegal for lenders to threaten you will jail time. No matter what they try to tell you, failure to repay a loan is not a criminal offense and you will not go to jail for it. However, you could go to jail if you ignore a court order, or your payday lender uses bad-check laws to file a criminal complaint.
Because of this, it is important to take any threat of legal action seriously. Do not ignore a court order. If you are threatened with jail time, the Consumer Financial Protection Bureau (CFPB) says you should contact your state attorney general’s office for help.
READ MORE: Can you go to jail for unpaid payday loans?
Your Credit Score Will Fall
Payday loans don’t require a credit check, but they can still hurt your credit history. Just like when you skip a payment on any other bill, your missed payment will be reported to the three major credit bureaus — Experian, Equifax and TransUnion. This means your credit score will immediately fall. That missed payment will stay on your credit report for seven years, and potential employers and landlords will see it. It also means that you’ll pay higher interest rates for any money you need to borrow.
Pro tip: If you go several months without making a payment, the debt could be charged off as bad credit, which is potentially devastating for your credit score.
READ MORE: How payday loans affect your credit score
You May Get a Court Summons
You could face a civil lawsuit for failing to repay your payday loan. Though you won’t go to jail over civil matters, you will get a notice to appear in court if you are sued. Do not ignore it. Failure to appear in court could lead to severe consequences, including wage garnishment or being jailed for contempt of court.
If you think you’re smarter than they are, think again. 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 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.
- Contempt of court: This is where jail time becomes a threat. If you fail to follow court orders, you may wind up in prison.
If you get a court summons, please seek legal advice.
READ MORE: Can payday lenders sue you?
Do You Need Payday Relief?
Get lower payments and interest rates with a payday loan consolidation program.
What to do When You Can’t Repay Your Payday Loan Debt
If you know you’ll have to default, there are a few steps you can take to minimize the damage to your financial situation.
If your debt has been past due for several weeks, contact the lender, explain the situation, and offer a settlement. Some lenders will accept a settlement that pays them half of what you owe because they’d rather get some money than have to charge off the account and end up with nothing at all.
Contact a Payday Loan Relief Company
A third-party payday relief company will be able to review your options and will know whether your payday loan could even be illegal. Schedule a free consultation to discuss your next steps.
READ MORE: Best payday loan relief programs
Learn Your Rights
Make sure you familiarize yourself with illegal debt collection practices. These are outlined in the Fair Debt Collection Practices Act. If your rights have been violated, you can threaten a countersuit.
Remove ACH Authorization
An ACH authorization form permits lenders to debit your checking account bi-weekly or monthly for a specific amount. To prevent this automatic deduction, you will have to revoke your authorization.
This means notifying both your bank and the payday lender that you are revoking 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 ensure the payday lender and financial institution have seen it. This revocation letter should arrive at the bank three days before payment.
Pro tip: After this, you’ll need to monitor your bank account to ensure that no withdrawals went through. Dispute the unauthorized transaction if necessary.
Get a Cash Advance
Many credit card cash advances are actually cheaper than payday loans. In addition, there are a number of cash advance apps that will offer you short-term loans but charge no interest. Instead, you’ll tip them. Dave and Albert are popular options.
READ MORE: Best cash advance apps
Get a Payday Alternative Loan
These PALs are small loans offered through federal credit unions as a low-cost alternative to high interest rate payday loans. Loan terms are longer, you can borrow a bit more money and the interest rate is capped at 28%.
READ MORE: Payday Alternative Loans
Check Your State’s Laws
Payday loans are illegal in some states. If you live in one of those states, it’s possible your loan violated state laws and you may not be obligated to repay it.
Some states have outlawed payday lending altogether, while others have capped annual percentage rates at 36%.
If you aren’t sure how to proceed, contact your state attorney general’s office.
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. Church and community groups have started forming alliances with banks to help eliminate the need for payday loans. Check to see if one of these groups operates in your area.
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 be unable to negotiate on the borrower’s behalf — payday lenders often refuse to work with credit counselors.
Pro tip: Watch out for credit counseling scams. Make sure the National Foundation for Credit Counseling accredits any credit counselor.
READ MORE: Credit counseling
Take Out a Debt Consolidation Loan
Borrowers can use debt consolidation loans or personal 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.
Ask a Friend or Family Member for Help
Talking about your financial situation is difficult, but if a family member is in a position to help you, don’t hesitate to ask, particularly if it can prevent you from getting trapped in the payday loan debt trap.
If you can’t get help close to home, there are even strangers on reddit who will fulfill loan requests.
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.
Other ways to rebuild credit include:
- Try a credit builder loan
- Use a secured credit card
- Capitalize on subscriptions you are already paying for
- Hire a credit repair company
The Bottom Line
Payday loans lead to a cycle of debt, which in turn traps borrowers. In a recent survey, more than 93% of payday loan borrowers said they regretted their original payday loan. If you can’t afford to repay your original loan, you can take a few steps to reduce the risk of long-term damage.
The best option overall is to get the money another way, whether through a credit card cash advance, debt consolidation loan or cash advance app. Then you can escape the debt trap once and for all.
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.
Payday loan requirements are very lenient. No credit score is required. All you need is:
A valid ID
Active bank account
Proof of income
Be 18 or up
Occasionally a payday lender might also require a Social Security number.
An extended payment plan (EPP) lets a borrower spread out the payments on their payday loan over an extended period of time. Instead of repaying the full loan on your next payday, you can choose to pay back your loan in installments.
Payday lenders often do not conduct a traditional credit check when considering a payday loan application, but that doesn’t mean they won’t affect your credit score. Though paying a payday loan on time won’t help your credit score, failing to make on-time payments will definitely hurt your score.