What happens when you can’t repay a payday loan?
Most of the time, people get a payday loan because they can’t get quick financing anywhere else. Unfortunately, the financial situation can worsen if the borrower is unable to repay what he owes.
Depending on how long it’s been since you received the loan, the lender could threaten to take legal action against you and garnish your wages. Borrowers in this situation have options that could potentially help them.
What can happen if you don’t repay a payday loan
While every situation may have differences, there are typical consequences when you don’t repay a payday loan on time.
Withdrawals from your bank account
Most lenders repeatedly attempt to withdraw the funds from your bank account, as permitted by the terms of the loan agreement. If transactions are declined by your bank due to insufficient funds, the lender may initiate withdrawals for lower amounts.
Even if the lender collects some of the outstanding balance using this method, you could still face financial hardship if further banking transactions are declined. Plus, bank charges could add up and cost you several hundred dollars in a short period of time.
Collection agencies get involved
You can expect the lender to initiate collection efforts, including repeated calls and letters demanding payment, while continually trying to write your account. The lender could also sell your debt to a collection agency or hire a lawyer to collect what is owed to you.
You may be able to stop collection actions by asking the lender for an extension. Some states have laws that require payday lenders to grant extended payment plans to borrowers upon request. Remember that these extensions often come with additional fees and interest.
Declining credit score
The lender could also report the delinquent account to the credit bureaus once it is turned over to a collection agency. Your credit score will likely drop and the negative mark will remain on your credit report for up to seven years. Therefore, you may find it difficult to obtain competitive financing offers in the future.
You can take steps to start rebuilding your credit score after defaulting on a payday loan. First, review your credit report to identify any other delinquent accounts and update it, as payment history is the most important part of your credit score. You also want to find errors and challenge them quickly.
Also adjust your spending plan to free up funds that you can use to start paying off credit card debt in the near future. You want to do this to lower your credit utilization rate, or the amount of revolving credit you use, because it makes up 30% of your credit score.
Most importantly, keep an eye on your credit report and build responsible debt management habits over time to give your credit score the best chance of getting stronger over time.
Negotiations with the lender
It’s much cheaper for the lender to collect than to sue you, and selling the balance to a debt collector for pennies on the dollar means the lender will only get a small percentage of what’s owed to them. .
Both circumstances give you the leverage to eventually settle payday loan debt for a fraction of the outstanding balance. Offer an amount you can afford to pay in one lump sum and mention your intention to file for bankruptcy if the lender won’t budge. The lender may be willing to compromise with you since bankruptcy means they may not be able to collect.
If the lender takes you to court, the onus is on them to prove that you owe the debt. Simply ask that they provide the documentation or agreement you signed when taking out the loan. If the debt collector cannot provide this information, the judge will likely dismiss the case. But if the lender proves that you are indebted and obtains a judgment from the courts, you could be ordered to pay or have your wages garnished.
Quick note: If the lender is threatening to throw you in jail, quickly contact your state attorney general’s office to file a complaint.
How to get the money to pay off a payday loan
Instead of ignoring a delinquent payday loan and ruining your credit, consider these options for paying off debt:
- Apply for a peer-to-peer lending. If your credit score is low, a peer-to-peer loan is worth considering. You will find these loan products in online lending marketplaces that connect potential borrowers with investors looking to lend you funds in exchange for a return. You can usually compare multiple loans with one application, and you’ll usually need to provide proof of income or assets to be approved.
- Obtain a debt consolidation loan. A debt consolidation loan allows you to combine high-interest debt into a single loan product with a lower interest rate. Most debt consolidation loans have a fixed interest rate and you will make equal monthly payments over a set period. The most competitive loan terms are reserved for borrowers with good or excellent credit. Even with less than optimal credit scores, your rate could be lower than what you received with the payday loan.
- Consider a short-term emergency loan. Credit unions and some community banks typically offer short-term emergency loans as alternatives to payday loans. 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.
- Register in a debt management plan (DMP). It should be used as a last resort if you have exhausted all your options. DMPs are available through non-profit agencies. A credit counselor will contact the payday lender on your behalf to negotiate a modified repayment plan that suits your budget. You’ll pay the loan principal balance in full, but the downside is that signing up for a DMP could cause other creditors to close your credit card accounts, causing further credit damage.
You can also try talking to friends and family or looking for ways to adjust your finances to cover expenses such as temporarily canceling streaming subscriptions, switching to a lower food budget.