What Happens If You Default on a Payday Loan
Payday loans are a type of short-term loan that you can borrow without having to go through a credit check. The loan is due within 14 days or when you receive your next paycheck, hence why they're called payday loans. Research from Pew Trust shows that 12 million Americans take out payday loans each year, presumably with the expectation that they'll be able to cover the loan by the time the next payday rolls around. Unfortunately, the likelihood of defaulting on a payday loan is very high. According to a study from the Center for Responsible Lending, 50 percent of payday loan borrowers default on a payday loan within two years of taking out the first loan. Once you default on a payday loan, getting back on track can be a difficult process.
How Payday Loan Default Happens
Once the due date rolls around you can either make a payment in person or the lender will draft the outstanding balance from your bank account. If the money isn't in your bank account and your bank doesn't pay the overdraft, the lender will keep trying to deduct the amount a few more times. Each time the payment is returned for insufficient funds, your bank will charge an insufficient funds fee which digs you into deeper debt with your bank at the same time the payday lender is trying to collect payment for your loan.
When the lender can't draft the balance from your bank account, they'll begin calling you to collect payment from you. They may email you or call you at work or contact your friends and relatives to find you can get you to pay. In the meantime, the outstanding payday loan balance may increase as fees, interest, and penalties are added.
The payday lender will try to collect from you for about 60 days before turning your payday loan over to a third-party debt collector to pursue you for payment. Then you'll have to deal with the collection agency, whose collection efforts may be more aggressive then the original payday lender.
How Payday Loan Default Affects Your Credit
Up to this point, your credit was safe from the payday loan. The loan wasn't added to your credit report when you first borrowed and your first missed payments weren't on your credit report. However, once the debt is placed with a collection agency, it will be added to your credit report. Because of this, defaulting on your payday loan can hurt your credit score.
Any negative checking account balance may also be turned over to a separate collection agency, leading to two separate collection accounts stemming from a single payday loan default.
Aggressive Collection Tactics for Defaulted Payday Loans
Either the lender or the collection agency may sue you for the outstanding balance. A lawsuit could result in a judgment entered against you if the court determines that you're legally obligated to pay. With a lawsuit judgment, the payday lender can get court permission to garnish your wages or levy your bank account.
While you can't be arrested for failing to repay a payday loan, some sneaky payday lenders may threaten to file theft by check or check fraud charges to attempt to get you to pay up. (In some cases, lenders may actually file the charges to have you arrested.)
Contact your state Attorney General if a payday lender or debt collector threatens to have you jailed over an unpaid payday loan. You can, however, be arrested for ignoring an order to appear in court. Consult with an attorney if you receive a court order. Even if you think it's bogus, getting a professional opinion can confirm your suspicions.
Avoiding Payday Loans
Payday loans are one of the most expensive types of loans you can borrow. It's also one of the most difficult types of loans to pay back. The average payday loan borrower is in debt for five months out of the year and ends up repaying over $500 in fees. If you're thinking about taking out a payday loan, don't. Exhaust every other option you have, including selling items or borrowing from a friend or family member, before taking out a payday loan so you can avoid the potential consequences of defaulting on a payday loan.