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What happens if you can't pay back a payday loan?

Published in Payday Loan Default Consequences 4 mins read

If you are unable to pay back a payday loan, the situation can quickly escalate from increasing debt to potential legal action, impacting your financial well-being.

Immediate Consequences of Non-Payment

When you miss a payday loan payment, the immediate repercussions can be severe, primarily due to high fees and the nature of these short-term loans:

  • Rollover Fees and Increasing Debt: Many lenders will offer to "roll over" your loan, extending the due date but adding significant new fees and interest. This can trap borrowers in a cycle of debt, where the amount owed quickly exceeds the original principal.
  • Bank Overdrafts: Payday lenders often have direct access to your bank account. If they attempt to withdraw the payment and there aren't sufficient funds, you could incur multiple overdraft fees from your bank, further depleting your account balance and potentially leading to account closure.

Escalation to Collections

Should you continue to be unable to pay, the lender will likely take further action to recover the money:

  • Loan Sent to Collections: The payday lender might send your loan to a collections agency. When your debt is with a collections agency, you will likely face additional fees and costs, making the total amount you owe even higher.
  • Aggressive Collection Practices: Collection agencies are known for persistent contact, including frequent calls and letters. While there are regulations like the Fair Debt Collection Practices Act (FDCPA) that protect consumers from harassment, the process can still be stressful. For more information on your rights, you can consult resources from the Consumer Financial Protection Bureau or the Federal Trade Commission.
  • Credit Score Impact: While initial payday loan defaults may not always be reported to major credit bureaus, once the debt goes to collections, it can negatively impact your credit score. A collection account on your credit report can make it difficult to get approved for future loans, credit cards, or even housing.

Potential Legal Action

If you continue to not pay the debt while it is in collections, the situation can escalate to legal proceedings:

  • Lawsuit by Collection Agency: The collection agency might try to sue you to get what you owe. If they win the lawsuit, they will obtain a court judgment against you.
  • Wage Garnishment or Bank Levies: With a court judgment, the collection agency may be able to legally garnish your wages (take money directly from your paycheck) or levy your bank accounts (seize funds from your account) to satisfy the debt. The ability to do this varies by state law.

What You Can Do

If you find yourself struggling to repay a payday loan, acting quickly is crucial to mitigate the consequences:

  • Talk to the Lender: To avoid collection actions, try talking to the manager of the store where you got the payday loan. Explain your situation and ask about options like an extended payment plan or a reduction in fees. Some lenders may be willing to work with you.
  • Seek Credit Counseling: Non-profit credit counseling agencies can help you understand your financial situation, create a budget, and explore debt management plans. They can also mediate with lenders on your behalf.
  • Understand Your Rights: Familiarize yourself with the Fair Debt Collection Practices Act (FDCPA), which protects you from abusive, deceptive, and unfair debt collection practices.
  • Explore Debt Relief Options: Depending on your financial situation, you might consider options like debt consolidation loans (if you qualify), debt settlement, or in extreme cases, bankruptcy. These options have their own implications and should be carefully considered with professional advice.

It's important to remember that defaulting on a payday loan can have long-lasting financial repercussions, making proactive communication and seeking help essential.

Summary of Consequences

Consequence Description What to Expect
Increased Debt Rollover fees, new interest, and additional charges from the lender. Original loan amount can quickly double or triple.
Bank Issues Overdraft fees from your bank due to attempted withdrawals by the lender. Multiple charges on your bank account; potential account closure.
Collections The lender sells the debt to a collection agency, adding more fees and aggressive contact. Frequent calls, letters, and emails; increased total debt.
Credit Damage Unpaid debt going to collections and/or a court judgment appearing on your credit report. Lower credit score, difficulty getting future loans, credit cards, or housing.
Legal Action The collection agency sues you for the debt, potentially leading to a court judgment. Summons to court; if judgment is granted, potential wage garnishment or bank levies.