What Happens When You Can’t Pay Off a Payday Loan?

Most of the time, people get a payday loan because they can’t get quick financing elsewhere. Unfortunately, the financial situation can get even worse if the borrower is unable to repay their debt.

Depending on how long it has been since you received the loan, the lender could threaten to file a lawsuit against you and garnish your wages. Borrowers in this situation have options that could potentially help.

What can happen if you fail to repay a payday loan?

While each situation may have some differences, there are some typical consequences of not repaying a payday loan on time.

Withdrawals from your bank account

Most lenders will repeatedly try to withdraw the money from your bank account as per the terms of the loan agreement. If the transactions are declined by your bank due to insufficient funds, the lender can issue payouts for smaller amounts.

Even if the lender collects part of the outstanding balance in this way, you could still get into financial trouble if other banking transactions are refused. Also, the bank fees could pile up and cost you several hundred dollars in a short period of time.

Collection agencies step in

You can expect the lender to initiate collection efforts, including repeated phone calls and letters demanding payment, while constantly trying to raise your account. The lender could also sell your debt to a collection agency or hire a lawyer to collect the debt owed.

You may be able to stop debt collection efforts by requesting an extension from the lender. Select states have laws that require payday lenders to provide borrowers with enhanced payment plans upon request. Note that these extensions often come with additional fees and interest.

Credit score goes down

The lender could also report the delinquent account to the credit bureaus once it has been turned over to a collection agency. Your credit score is likely to decline, and the negative grade will remain on your credit report for up to seven years. Consequently, you may find it difficult to obtain competitive financing offers in the future.

There are a few steps you can take to start rebuilding your credit score after you default on a payday loan. First, review your credit report to identify other delinquent accounts and keep them up to date, since payment history is the largest component of your credit score. They also want to look for mistakes and dispute them in a timely manner.

Also, adjust your spending plan to free up funds that you can use to start paying down credit card debt in the near future. You want to do this to reduce your credit utilization ratio, or the amount of revolving credit you use since it accounts for 30 percent of your credit score.

Most importantly, keep an eye on your credit report and practice responsible debt management habits over time to give your credit score the best chance of strengthening over time.

Negotiations with the lender

It’s far less costly for the lender to collect than it is to sue you in court, and selling the balance to a debt collector for pennies on the dollar means the lender only gets a small percentage of what’s owed.

Both of these circumstances give you the leverage you need to pay off the payday loan debt for potentially a fraction of the amount outstanding. Offer an amount you can afford and mention your intention to file for bankruptcy if the lender isn’t willing to back down. The lender may be willing to compromise with you as bankruptcy means they may not have a chance to collect money.

lender’s lawsuit

If the lender takes you to court, the onus is on them to prove that you owe the debt. Just ask for the paperwork or the contract you signed when you took out the loan. If the debt collector cannot provide this information, the judge will likely dismiss the case. But if the lender proves you owe it and obtains a court order, you could be fined or your salary hung.

Quick tip: if the lender threatens to throw you in jail, contact the Attorney General’s Office immediately to file a complaint.

How to get the money to pay off a payday loan

Instead of ignoring a defaulting payday loan and possibly ruining your credit, consider these options to pay off the debt:

  • Apply for peer to peer lending. If your credit rating is bad, a peer-to-peer loan is worth considering. You can find these lending products on online lending marketplaces that match potential borrowers with investors who want to lend you money for a return. You can generally compare multiple loans in one application, and you usually need to provide proof of income or assets to be approved.
  • Get one Debt Consolidation Loan. A debt consolidation loan allows you to convert high-interest-bearing debt into a single loan product with a lower interest rate. Most debt consolidation loans have a fixed interest rate, and you pay equal monthly payments over a set period of time. The most favorable loan terms are reserved for borrowers with good or very good credit ratings. Even with less than optimal credit scores, your rate may be lower than what you got with the payday loan.
  • Consider a short-term emergency loan. Credit unions and select community banks commonly offer short-term emergency loans as payday loan alternatives. They are usually available with slightly lower interest rates and for small dollar amounts capped at $1,000 and may not require a credit check for approval.
  • Sign up for one Debt Management Plan (DMP). It should be used as a last resort when you have exhausted all your options. DMPs are available through nonprofit agencies. A loan advisor will contact the payday lender on your behalf to negotiate a modified repayment schedule that works for your budget. You pay the principal of the loan in full, but the downside is that registering with a DMP could prompt other creditors to close your credit card accounts, which could result in further credit damage.

You could also try talking to friends and family or look for ways to adjust your finances to help cover expenses such as B. Temporarily cancel streaming subscriptions or switch to a lower grocery budget.

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