Payday Loan Default: Consequences and Available Options

Payday loans can help you out of an unexpected financial problem when used responsibly. You might find yourself in this situation if your car breaks down suddenly, a loved one has passed, or there is a medical emergency that you weren’t prepared for that occurs. Twelve million people every year use payday loans for access to this quick cash, according to Pew research.

These types of loans are short-term loans in nature and generally taken out for a small amount, usually $500 or less. Pew’s research also shows that the average amount borrowed for a payday loan is $395. The amount loaned plus the interest is due generally in 14 days, usually the next time you receive your paycheck.

There is little doubt that life often brings surprises. And that not all surprises are pleasant. When you take out a loan, you have it all planned perfectly so that you will have it paid back on time. Then, before you know it, something else happens that makes it impossible to make the payments you promised to pay the loan on time. Things like that happen, but it doesn’t have to be the end of the world.

What Happens If I Don’t Pay My Payday loan and What I Should Expect

The failure to pay a payday loan can have negative effects on your credit and cost you more money. The best thing you can do is to take action and contact the lender as soon as possible.

When you move quickly, rather than put it off, it is more likely you will be able to minimize the potential damage to your finances and your credit. Not only that but when you act quickly, the cleanup of the problem goes more smoothly. So, the lender has a much better impression of your sense of responsibility.

You will likely be slapped with a late payment fee if they can’t collect their payment on the due date. Expect that additional fee to be at least equal to the amount of interest you agreed to pay for the loan. However, they will continue to collect the interest on the debt, usually about one percent per day. This means a $300 loan could expand to debt of as much as $500 within a week after missing your payment date.

In some states, you could be charged an additional fee if the check or electronic transfer fails. In some states, they can sue you. And if you’re found liable, they can collect as much as three times the amount of the check or authorized transfer.

Consider that not all lenders are completely transparent with regard to their fees and late payment policies. So, you could be hit with even more penalties and fees if your state allows it.

Your failure to pay back the loan on time could also be reported to a credit bureau. Additionally, it will have a negative effect on your credit report and your credit score. As a result, making it more difficult and expensive to get the money you need later on.

Your Account Due Date and The Benefit of Working with The Lender

If you have a payday loan, you agreed to pay the entire loan, plus fees, within a specified time. In most cases, you have left the lender with a post-dated check to cash on the specified day.

In other cases, you have authorized an electronic transfer for a specific day. It is your responsibility to make sure the money is in your account on that particular day.

That is why it’s important that you check your bank account before the due date of your loan. That way, if you find that you can’t pay a payday loan back on time, it is possible to avoid some of the payday loan dangers and adverse outcomes. If you need help remembering, set up an alarm on your phone to remind you.

If you know beforehand that the transaction won’t be completed successfully, you can speak to the lender before the process is attempted, and your bank account becomes overdrawn. So, the lender can work things out with you in a way that makes both of you happy.

Most lenders will work out a repayment plan that may include an extra fee. But you may avoid heavy late charges, returned check fees, and overdraft fees from both your lender and your bank. A payday loan repayment plan could prevent a payday loan default from occurring.

Other Options if You Can’t Pay

What to do if you can't repay your loan

Other options can easily be found if you need them although they may not be as fruitful as simply working through the problem with the lender.

1. For example, if you have some money in your account, but you need it to pay other, more important bills. So, you can contact your bank and either stop payment on the check or ask to cancel the direct debit.

Consider that you are still responsible for your debt. In fact, if your bank stops payment, either way, you will always have to pay back the money somehow. However, this could very well buy you a couple of days to begin the process of developing a repayment plan with the lender.

2. Friends or family who might be able to help you out might be another option for you. If you are able to borrow a few hundred dollars to repay your payday loan, you might not have to pay your friend or family member back with interest. Just be sure to work out a good repayment plan to keep your relationship positive.

3. Do you have electronics, furniture, or other items that you have considered selling? Now might be the time to declutter and get some quick cash. There are many online marketplaces such as eBay, Facebook Market, or Craigslist that you can find a lot of potential buyers.

4. Another possible option is to consolidate or refinance your loan. A personal loan has lower interest rate costs and required payments. The loan has a longer-term, usually between three to five years to pay it back. Personal loans are accessible through banks, credit unions, and online lenders. If you choose this option, then make sure that you are applying for these loans around the same time. This will reduce the impact on your credit and also give you the chance to compare offers to get the best deal.

5. Don’t qualify for an unsecured personal loan? You can also try consolidating your debt with a secured loan. The chances of you qualifying for a secured loan is higher because you are backing it with an asset as collateral. You should understand that you risk losing your asset if you fail to repay the loan before taking out a secured loan. For example, if you put up your home as collateral, that could mean losing it in a foreclosure.

If the situation arises that you’ve exhausted all these options, then you might consider making your payment late. Of course, this is not an ideal plan to ever make your loan payments past the due date. At the very least, you should make your payment within 30 days of the due date.

Late payments are generally not reported to the credit bureaus until after that time. That should at least keep your credit from being hurt and some time to get caught back up.

What to Do if the Payday Loan Goes into Collections

Question Mark

What happens if you default on a payday loan is that your lender will likely send your debt to a collection agency. You still have a chance to have a decent outcome. You could be able to negotiate the balance so that you only half to pay part of the debt back. Collection agencies are third-parties who have purchased your debt from the lender at a discount. They will attempt to collect that debt from you to make a profit.

You might be able to come to an agreement with the collector where you pay a portion of the total amount due. This could be possible as long as the amount you pay allows the collector a profit margin over what they paid for your debt. The drawback of this is that your credit report will have a note stating that the account was “settled.” Collection accounts stay on your credit report for seven years.

How to Always Keep Up with Your Loan Repayments

The best prevention from falling behind on your loan repayment has a long-term solution in place. The possible repercussions of what happens if you don’t pay a loan company back could put you in a financial bind and affect your credit.

Create a budget that takes into account all your monthly expenses, which include gas, rent, food, utilities, insurance, and entertainment. Now subtract your monthly income and see what you have leftover.

Ideally, for at least a month, you should track every penny you spend to make sure it falls in line with your budget. Figure out ways that you can earn more money like a part-time job like Uber or Door Dash. If you don’t have enough time for a gig, then look for ways to cut your spending.

The extra money that you get from a second job, cutting spending or a combination of both should be used to set up an emergency fund. It is a savings account that you keep tucked away to cover expenses you weren’t expecting. Start with a small goal like saving up a few hundred dollars and work your up from there, so you’ve built a good cushion.

Bottom line

Being in the situation of not being able to repay your payday loan only has to be temporary. You have options that are available to you to help with payday loans, though they might all be that ideal. The best thing that you can do is learn from them and be proactive when it comes to your finances. A budget will help you get your finances in order and an emergency fund that can be relied on next time the unexpected happens.

Kerry Vetter
by Kerry Vetter
Published 2020-02-21
Kerry Vetter is a consumer finance expert and writer, who has been engaged in creating finance-related content for more than ten years. Her expertise is approved by obtaining a Bachelor of Science in Finance from Boston College, as well as receiving three major certificates as a professional advisor and counselor.  At the moment, Kerry is an author of multiple educational articles and insights that have been created in order to increase and develop financial literacy and responsible borrowing among US citizens. Her expert relevant savings advice has helped a lot of people overcome their financial issues and find out more about principles of smart spending, the right investment decisions, and budgeting.  You can read more about Kerry's professional background here.