Payday loans represent a risky form of borrowing that we recommend you stay away from. They are usually issued for small amounts, commonly $500 or less. Many states set limits on their size. Depending on your state laws, payday loans are available through either storefront payday lenders or online. These loans usually need to be repaid by your next payday, typically two to four weeks from the date the lender issued the loan. Payday loans come at a high cost, as the fees can range from $10 to $30 for every $100 borrowed. The application process is relatively straightforward, and you typically need to provide proof of identity, employment and income. Payday lenders generally don’t run a credit check, consider your creditworthiness or factor in your ability to repay the loan.
When you receive your payday loan, the funds are either electronically deposited into your bank account or provided through cash, check or debit card. For repayment, you generally write a postdated check for the loan balance plus any applicable fees or authorize the payday lender to electronically withdraw the funds from your account. If you don’t repay the loan on or before the due date, the lender can cash the check or withdraw the amount from your account.
What Happens if You Don’t Pay Back a Payday Loan?
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.
How To Repay a Payday Loan
Because payday loans are so short-term, it may be difficult to repay the loan in full when it’s due. Lenders may offer a few options for repayment, including rolling over your payment or extending your repayment plan.
Make the Full Payment on the Due Date
The best option for repaying a payday loan is to pay back the loan on its due date for the full amount, including any interest or fees. You can return to a payday storefront lender to repay the loan in person, or the money can be electronically debited from your bank account if you’ve provided authorization.
Make sure that you have enough money in your account to cover the loan and any associated fees so you can pay on time without incurring additional costs. Read your loan agreement carefully to understand how your loan will be repaid and what the total cost of the loan may be.
Extended Repayment Plans
If you can’t fully repay your payday loan on time, you can ask your lender if they offer an extended repayment plan. This payment plan allows you to repay your loan in smaller amounts over a longer period. Ask if there’s a cost to the extended repayment plan — your payday lender may offer you a plan for free, or they may charge additional fees.
If an extended repayment plan isn’t available for your loan and you’re struggling to pay it off, look into other resources in your area that may be able to help, like a credit counselor or legal aid.
Roll it Over
If you cannot pay back your loan at its due date, most lenders give you the option to roll over, or renew, the loan. In that circumstance, you buy yourself extra time at the cost of more fees.
For example, let’s say you borrow $300. Your original amount to pay back the lender would be $345 (borrowed amount plus a $45 fee). If you roll over the loan, you would simply pay $45 in new fees and in two weeks (or whatever the term amount is) you would pay the rest.
Doing this buys you time, but it increases the overall amount you have borrowed and is a way to get caught in a cycle of debt. Rolling over in no way reduces the principal amount you borrowed, or any earlier fees you might have incurred. Because this is a common way people get into trouble with payday loans, we don’t recommend going this route.
Escaping the Payday Loan Cycle
It may be hard not to rely on payday loans when you’re struggling to make ends meet, and you may become trapped in a cycle of debt. You can take some steps to try to escape the payday loan cycle, like budgeting and building savings to avoid payday loans or seeking alternative financial assistance. To read more click here.