What Happens If You Don’t Pay Back a Payday Loan?
7 Min Read
So you’ve taken out a payday cash loan and now have to pay it back. But what happens if you don’t? The short answer is that your payday lender will come after you. They’ll try to get the money they’re owed by any means necessary, including repossessing your car and garnishing your wages. They’ll take a percentage of the next payday until they’ve recouped the total amount of their loan. They might even sue you in civil court if nothing else works.
But let’s take the consequences one at a time and see what happens if you don’t pay back a payday loan.
What are the Consequences If You Default on a Payday Loan?
You don’t want to be in a position where you can’t pay back a payday loan. But what happens if so? Well, you should always try to avoid taking out payday loans in the first place.
Moriah Costa, the author of Clever Girl Finance Blog, says that “the difficulty with fast payday loans is that if you’re already struggling financially, it might be difficult to pay off the initial loan. If you can’t pay back the loan, you can ask the payday lender to roll it over. That means you have to pay the original loan amount and interest rate, plus an additional finance charge on top of that.”
If you do take out a short-term loan and then find yourself unable to pay it back, here’s what might happen exactly:
1. You will pay additional fees and interest.
Payday loans have a fixed interest rate, which is predictable and easy to manage. But if you don’t pay back your small loans on time, you will pay additional charges (like bank overdraft fees) and interest rates on top of what you initially borrowed. By federal law, these additional fees can be as much as $100 of bank fee or more on top of the original cost of the loan. It makes it even harder to pay off your debt since you’ll be paying more than what you initially borrowed.
2. Debt collections’ agencies will search for you.
If you don’t pay back your payday loan, the money provider will likely send it to a debt collection agency. Debt collectors are companies that help collect money for other individuals or businesses.
When a loan provider sends your defaulted loan to a debt collector, the collection agency can call you and even send letters. Their collection efforts will be more aggressive compared to lenders. Debt collection agencies might want to settle out of court or go through the court system if you don’t pay them back.
3. Your credit score will be damaged.
If you can’t pay back the debt, the payday loan lender will likely report it to the credit bureaus. It is called “negative” because it negatively impacts payday loan borrowers’ credit scores.
The Pew Charitable Trusts website explains in detail the negative effect of defaulting your payday loan.
Your credit score may go down if you don’t repay your payday loan, but it may not stay down for long. If you do some damage control by paying off the unpaid debt or negotiating with the service provider to get them to remove the negative information from your credit reports, then your credit score could bounce back up again.
4. Lenders will initiate court summons.
If you don’t pay back a payday loan, payday loan company can sue you if you sign the cash advance loan agreement. Many lenders will seize you in court and take whatever they can get, including your car or house. Plus, they can freeze your bank account.
That’s right: If you don’t repay your fast cash loans and the service provider has to go through the court system to get the payday loan debt they are owed, they can get a judgment against you and then garnish your wages or bank account. That is why we recommend you to avoid wage garnishment at all costs.
5. It will take a lot of work to secure your future financing.
You might think this isn’t a problem as long as you can get another loan. But if you don’t pay back your first loan, it may be impossible to get a second one.
That’s because when lenders or cash advance apps evaluate your credit report before approving a loan, they perform a credit check for any outstanding debts with other lenders (and those unpaid debts show up on your credit report). So if any outstanding loans haven’t been paid off yet and your credit utilization ratio is high, it can hurt your ability to secure new financing.
6. You will be threatened with arrest.
If a payday loan default happens, you will receive a notice from the lender threatening to have you arrested. If you still don’t pay, they may file a lawsuit against you. According to the Consumer Financial Protection Bureau, it can result in an arrest warrant being issued and your property being seized by the sheriff.
Other Options If You Cannot Pay a Payday Loan
If you’re unable to pay a payday loan, you may take advantage of one of these options:
- Negotiate with the lender. Payday lenders are willing to work with a responsible borrower when facing financial hardship. If you can’t pay your loans in full, ask if they will accept a partial payment to get you back on track.
- Apply for an extension or payment plan. Depending on your state law, some lenders will offer extensions if you face a financial situation and need more time to come up with the money. Others may offer a debt management plan that allows you to pay off your debt over several months or years.
- Refinance your debts with another lender. Some payday lenders have relationships with other financial institutions where they can refinance your small loan at lower interest rates and terms than those offered by the original lender.
How to Rebuild Credit Score After Defaulting on a Payday Loan?
The first thing you should do is contact the lender and see if you can work out a payment plan. If you can’t, then consider looking for alternatives to payday loans.
If none of these options work for you, then there are some steps that you can take to rebuild your credit after defaulting on a payday loan:
- Contact your creditors and see what options they have for you. Some may offer a settlement or payment plan for a debt consolidation loan (like a personal loan) at reduced rates. Others may be willing to remove late payments from your credit report if you pay the total amount of debts in full immediately (with no interest).
- Pay off all outstanding debt as quickly as possible by making monthly payments toward each debt until they’re paid off (this may mean consolidating multiple unsecured debts into one).
- Start building good credit by using only one credit card (with low limits), paying all bills on time, and keeping balances low relative to available credit limits (no more than 30%). Also, take care of your credit utilization rate: the lower, the better.
- Speak with a credit counselor or bankruptcy attorney. Usually, credit counselors give valuable advice on how to improve your credit history and get a convenient repayment plan. If you don’t have enough money to pay for one, try free counselors from the State Attorney General’s Office or from the Internet that are ready to help you rebuild a payment history or have a positive court appearance.
Can You Go to Jail for Not Repaying Your Payday Loan?
It’s possible to go to jail for not repaying your payday cash loan. If you cannot pay back your payday loan, the service provider might sue you in court. If you don’t pay them back, they can ask the court to hold you in contempt of court and send you to jail until you pay them back or until your debt is paid off.
How Long Does an Unpaid Payday Loan Stay on My Credit Report?
The answer to this question depends on the type of financial product you took out. If you took out a loan with a bank, local credit union, or financial institution, the information on your credit report would stay there for up to seven years. If you took out a payday cash loan through an online lender, the information would remain on your report until the loan is paid in full.
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