Because of their short-term nature, payday loans can be challenging to pay back on time. If you don’t pay back your loan, the payday lender can send your loan to collections or take legal action against you.
You may pay hefty fees for not paying on time, and your credit score can be adversely affected.
Bank Account Debits and Overdrafts
When your payday loan is due, your lender will cash your postdated check or, if you’ve provided the lender with payment authorization, they can electronically access your account to withdraw the amount you owe.
If you don’t have enough money in your account to either cover the check amount or the withdrawal amount, your bank may charge you overdraft fees. The payday lender may try to withdraw smaller amounts rather than the entire amount at one time, and each attempt may incur an overdraft fee from your bank if you don’t have sufficient funds. The lender may also charge fees for the loan not being paid. These fees can quickly add up.
If you provided account authorization to the payday lender, you can tell your bank to stop payment. Your bank won’t issue any scheduled or future payments to the lender. Be aware, though, that banks usually charge a fee for stop-payment orders. And stopping any automatic payments on your payday loan doesn’t cancel your loan agreement with your lender — you still owe the loan balance.
Collection Calls and Emails
When a payday loan isn’t repaid, lenders may start a collection process to get their money back. Payday lenders may contact you by phone or email about your debt and can also contact the references or relatives you listed on your loan application. Lenders will continue their attempts to contact you, and the multiple calls and notices can further add to the stress of defaulting on your loan.
If their efforts aren’t successful, payday lenders may hire a third-party debt collector to take over the collection process. A collection agency may pursue you more aggressively to get you to repay your loan. Their collection fees can be added to what you already owe.
Impact on Credit Score
When you don’t pay back a payday loan and it goes into debt collection, this collection activity is likely to be reported to the credit bureaus. This can lower your credit score and negatively impact your creditworthiness.
Loan defaults can remain on your credit report for up to seven years, according to the Consumer Financial Protection Bureau. This damage to your credit can make it harder to secure financing in the future. And if you do manage to obtain financing, your lower credit score will likely result in much higher interest rates.
Legal Actions and Lawsuits
Once your payday loan has gone into debt collection, your lender or debt collector may sue you to collect your debt, even if it’s a small amount. If the lawsuit is successful, the court will issue a judgment against you for the amount you owe.
This money judgment allows the payday lender or debt collector to pursue further methods to collect the money and fees you owe. The lender or collector can garnish your wages or benefits to pay the debt or place liens on your property.
If you have a money judgment against you and ignore an order to appear in court, a judge may issue an arrest warrant. Never ignore a court order and appear in court when necessary. You may want to get legal advice or consult with an attorney in this situation.