What Happens When You Can’t Pay Off A Payday Loan?

Often, people get a payday loan because they can’t get quick funds elsewhere. Unfortunately, the financial situation can worsen if the borrower is unable to repay their debt.

Depending on how long it has been since you received the loan, the lender may threaten to file a lawsuit against you and trim your wages. Borrowers in this situation have options that could possibly help.

What can happen if you don’t pay off a payday loan

While each situation may be different, there are some common consequences when you don’t pay off a payday loan on time.

Withdrawals from your bank account

Most lenders repeatedly attempt to withdraw funds from your bank account, as allowed according to the terms of the loan agreement. If transactions are declined by your bank due to insufficient funds, the lender may initiate withdrawals for smaller amounts.

Even if the lender collects a portion of the outstanding balance using this method, you may still face financial problems if other banking transactions are declined. Plus, bank fees can pile up, costing several hundred dollars in a short period of time.

Collection agencies participate

You can expect the lender to initiate collection efforts, including repeated calls and letters asking for payment, while constantly trying to draft your account. The lender can also sell your debt to a collection agency or hire an attorney to collect what is owed.

You can stop collection actions by requesting an extension from the lender. Select states have laws that require payday lenders to provide extended repayment plans to borrowers upon request. Note that these extensions often include additional fees and interest.

Credit score decreases

The lender can also report the delinquent account to credit bureaus once it has been handed over to a collection agency. Your credit score is likely to drop, and the negative score will remain on your credit report for up to seven years. As a result, you will have a hard time getting competitive funding offers in the future.

You can take some action to start rebuilding your credit score after defaulting on a payday loan. First, check your credit report to identify any other past-due accounts, and bring them to the present because payment history is the largest part of your credit score. You also want to find errors and dispute them right away.

Also, adjust your spending plan to free up funds that you can use to start paying off credit card debts in the near future. You want to do this to reduce your credit utilization ratio, or the amount of revolving credit you use, because it is worth 30 percent of your credit score.

Most importantly, monitor your credit report and practice responsible debt management practices over time to give your credit score the best chance to strengthen over time.

Negotiation with the lender

It’s cheaper for the lender to collect than to sue you in a court of law, and selling the balance to a debt collector for pennies on the dollar means the lender only gets a small percentage of what owed.

Both circumstances give you the leverage necessary to possibly repay the payday loan debt for a portion of the outstanding balance. Offer an amount you can afford to pay at once and mention your intention to file for bankruptcy if the lender is not willing to move. The lender may be willing to compromise with you because bankruptcy means they may not have a chance to collect.

Lawsuit from the lender

If the lender takes you to court, the burden of proof is on them to prove you owe the debt. Just ask them to provide documentation or the agreement you signed when you took out the loan. If the debt collector is unable to provide this information, the judge will likely dismiss the case. But if the lender can prove you owe and get a verdict from the courts, you can be ordered to pay or have your wages trimmed.

Quick note: If the lender threatens to throw you in jail, contact your state attorney general’s office immediately to file a complaint.

How to get money to pay off a payday loan

Instead of dismissing a delinquent payday loan and possibly damaging your credit, consider these options for paying off the loan:

  • Apply for a peer-to-peer loan. 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 match potential borrowers to investors looking to lend funds to you in exchange for a return. Generally, you can compare multiple loans in one application, and you usually need to provide proof of income or assets to be approved.
  • Get debt consolidation debt. Debt consolidation loan lets you roll high interest debts 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 fixed period of time. The most competitive loan terms are reserved for borrowers with good or good credit. Even with less optimal credit scores, your rate may be lower than what you received on the payday loan.
  • Consider a short-term emergency loan. Loan unions and select community banks typically offer short-term emergency loans as payday loan alternatives. They are typically available with slightly lower interest rates and for small dollar amounts, capped at $ 1,000, and may not require a credit check for approval.
  • Enroll 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 advisor will contact the lender on payday for you to negotiate a revised repayment plan that works for your budget. You will pay off the principal balance of the loan in full, but the downside is that enrolling in a DMP can prompt other lenders to close your credit card accounts, causing further credit damage.

You can also try talking to friends and family or find ways to organize your finances to cover costs such as temporarily canceling streaming subscriptions, moving to a lower food budget.