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Defaulting On Payday Loans

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Payday loans are short-term, high-cost loans that borrowers can use to cover expenses that arise when funds are low, and payday is not far away.

Payday loans usually are considerably smaller than conventional loans, but failing to pay one off can still tank your credit.

Tanked credit is just the tip of the iceberg. Defaulting on a payday loan can lead to overdraft fees, relentless collection calls, and a costly court appearance.

Payday loan lenders are skilled in targeting consumers they think will struggle to pay off the debt. According to the National Consumer Law Center (NCLC), a borrower who defaults can be a more profitable customer than one who prepays the loan in full.

Below we will break down what happens if you default on a payday loan and the steps borrowers should take to mitigate damages while protecting their assets.

How Will Payday Loan Lenders Try and Recover Outstanding Debt?

Some loan agreements provide access to your bank account, which creditors will use to withdraw funds when they’re due. This may seem like a good idea until the day you’re low on funds and unable to make your next payment.

Linked bank accounts can be a direct source for creditors to recoup funds. Aggressive lenders might pull funds directly If the borrower provided bank access during the initial period of the loan agreement. These transactions can quickly drain your account or spiral into overdraft fees.

Lenders will call you to discuss/demand repayment. They’ll contact relatives and references you named in your loan application. Knowing your rights when dealing with payday lenders and debt collectors is essential.

There are strict rules regarding what debt collectors can ask about you.

  • Where you live.
  • What your phone number is.
  • Where you work.
  • May ask your employer for your address or telephone number.

Generally, debt collectors can call people you know only once and can’t mention that they’re collecting a debt.

In most cases, a debt collector can only discuss your debt with a few people other than yourself.

  • Your spouse.
  • Your parents (if you are a minor).
  • Your guardian, executor, or administrator.

Check out the Consumer Financial Protection Bureau’s (CFPB) website for sample letters you can use to respond to a debt collector.

Consequences Of Defaulting On A Payday Loan

Ignoring an overdue payday loan will inevitably lead to default. This is the quickest route to receiving an onslaught of collection calls from impatient lenders. You may incur fees and added interest charges followed by more pressure and aggressive collection tactics by lenders. Ultimately this could land you in court and will certainly impact your credit score, making it harder to secure future funding opportunities.

Additional Fees And Interest

Lenders will try to recover the money you owe by pulling it straight from your account. If your loan agreement gives them access to your bank account, the lender may attempt successive withdrawals, and if you’re low on funds, this could trigger several overdraft fees. Your lender will have little sympathy for the fees it costs you and will likely ramp up tactics if unable to collect.

Debt Collection Activity And Tactics

Initially, payday lenders will try to collect the overdue debt before enlisting the help of a debt collector.

Under the federal Fair Debt Collection Practices Act, a debt collector is a person or a company that regularly collects debts owed to others, usually when those debts are past-due. This could refer to a debt collection agency or law firm.

Debt collectors will use several tactics to pursue the loan, including contacting your employer, relatives, or anyone listed as a reference on the loan.

Court Summons

Lenders can sue and take you to court even over small amounts. If you don’t attend court, the judge likely will enter a default judgment in favor of the lender or collection agency. Laws vary by state, and the consequences of a court summons will depend on where you live. If you lose your court battle, a judge may grant the lender the right to garnish your wages. Bank account levies and property liens are also possible.

Your Credit Score Will Be Negatively Affected

It’s common for payday lenders to issue loans without a credit check, but that doesn’t mean your credit score is safe from harm if you default. Failure to repay a payday loan will harm your credit and ability to obtain a loan in the near future. Credit counseling can help borrowers manage their finances after default and work to rebuild their credit scores.

Difficulty Securing Future Financing

Defaulting on a payday loan will harm your credit and make it hard for you to secure future financing. Payday loan defaults can tarnish your credit report for up to seven years. During that time, any lenders you contact can access your credit report and view the details of your default. They will be weary of extending you an offer, and if they do, the interest will likely be astronomical.

Can You Go to Jail for Not Paying a Payday Loan?

Defaulting on a loan or failing to repay a loan is not a criminal offense and will not land you in jail. Payday lenders may use loopholes or poorly-worded legislation to file criminal complaints against borrowers. Individuals should be vigilant and take action if they cannot pay off a payday loan. Contact your state attorney general’s office if you have been threatened with arrest for nonpayment of a loan.

Note:  If you are sued, or a court judgment has been entered against you, and you ignore a court order to appear, a judge may issue a warrant for your arrest.

What to Do If You Can’t Repay a Payday Loan

Borrowers have several options when it comes to paying off their payday loans. Taking action as soon as you encounter difficulties paying off the debt is essential. The longer you wait, the more complicated and costly it will be to resolve. Below are some methods for tackling overdue payday loans.

  • Negotiating with your lender: Some lenders will be open to negotiating your debt. From their perspective, it may make more sense to accept a smaller amount from you than you owe rather than reaching out to a third party (debt collector), which may incur fees and more headaches than the debt is worth. Offer to pay a portion of the debt and let them know you’re considering bankruptcy, which would leave them with nothing.
  • Credit counseling can help with payday loans: This program advises borrowers on managing their money and can set them up on a payoff plan to eliminate debt. Nonprofit credit agencies provide credit counseling for consumers of all income levels, even those with poor credit scores.
  • Debt consolidation loans: This is an unsecured personal loan that borrowers can use to organize their debts into a single monthly payment while potentially reducing interest rates. The interest rate you are offered, will depend on your income and credit score.
  • Borrowing from friends or family: While it can be hard to reach out for help, sometimes relatives are our best option for paying off debt. They can be easier than lenders when it comes to repayment terms. Be sure to approach your relative with the same level of professionalism as you would a bank or lender. Drawing up a loan contract can also help protect both parties if a disagreement arises.
  • Bankruptcy: This is, for many borrowers, a sign of defeat, but that’s an incomplete way of looking at it. The downside is that your credit will tank, and lenders will reject almost any loan request you send. The upside is that these damaging effects are temporary. Bankruptcy is the first step to regaining your financial freedom, as it will free you of almost all debts. However, it is a serious step that should make you cautious about future financial undertakings. Do your research and ensure you have eliminated all other payoff options.

Get Help with Your Financial Situation

Credit counseling can help borrowers navigate financial difficulties and overwhelming amounts of debt. These programs help borrowers avoid bankruptcy and escape the debt cycle that includes climbing interest rates, overdue fees, and crumbling credit scores. A credit counselor will advise you on how to budget and manage your money efficiently so you can cover necessary expenses while targeting long-term financial goals.

Credit counseling programs are run by credit counseling agencies. These are usually nonprofit companies that may provide pre-bankruptcy counseling, housing counseling, student loan counseling, and credit counseling. By law, they must offer the best financial advice for your specific situation, or they risk losing their status as a nonprofit agency.

About The Author

Bents Dulcio

Bents Dulcio writes with a humble, field-level view on personal finance. He learned how to cut financial corners while acquiring a B.S. degree in Political Science at Florida State University. Bents has experience with student loans, affordable housing, budgeting to include an auto loan and other personal finance matters that greet all Millennials when they graduate. He has a prodigious appetite for reading, which he helps feed with writing from Scottish philosopher Adam Smith, the “Father of Capitalism.” Bents writing also has been published by JPMorgan Chase, TheSimpleDollar and


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