Personal Loans

What Happens If You Don’t Payback A Payday Loan

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

You still have choices if you’re in a loop of payday loans that you can’t payback. A payday loan sounds like a good option when you’re in a rush for cash. You’ve paid your bills on time and are now current with your obligations. What Happens If You Don’t Payback A Payday Loan?

A payday loan

You return a payday loan by the following payday and are given a little amount of money, generally $500 or less. Some of them may be purchased online, but most of them can be found in your local area. In the United States, there are more than 23,000 payday loan lenders, which is more than the number of McDonald’s restaurants in the country.

Payday loans are returned as a whole, unlike other loans, which have a repayment plan. The $500 you borrowed will be repaid in a single payment.

To get a payday loan, you’ll need to submit a postdated check to cover the amount of the loan. Between the time you apply for the loan and the time it’s due, any fees or interest will accumulate. Payday loans have APRs as high as 400 percent when other personal loans have APRs of 15 to 30 percent.

Repayment can take anywhere from two to four weeks, depending on your payday loan provider and when your paycheck arrives.

What if you are unable to repay your payday loan?

There is no credit check when you get a payday loan. Payday lenders, on the other hand, don’t bother to verify your creditworthiness. For those with poor credit, this sounds like an excellent option.

Pew Charitable Trust estimates that 12 million Americans use payday loans each year, with a total cost of $9 billion only in fees. Many borrowers renew or reborrow their payday loans because they cannot afford to pay them back all at once.

It’s customary to extend a loan. It is estimated that 80 percent of payday loans are renewed within two weeks of the original borrower, according to the Consumer Financial Protection Bureau (CFPB). Take out another loan to prevent defaulting on your current debt or possibly being late on payments. Because payday lenders know they’ll get their money back, they accept this.

Defaulting on your loan is a real possibility if you don’t make timely payments. When you fail to make your loan installments on time, you are said to have defaulted. A debt collector may ultimately be assigned to your account, and they will make contact with you to demand that you repay the loan in full. At this point, many borrowers begin to stress over how they will pay back their payday loan debt.

How payday loan defaults might influence your credit

If you are unable to maintain the payday loan cycle and get behind on payments, you will eventually default on the loan, resulting in a drop in your credit score.

“If a payday loan is defaulted on, the delinquency will appear on the borrower’s credit record,” explains Rob Drury, Executive Director of the Association of Christian Financial Advisors. “The most detrimental factors to one’s credit score are bad information and overdue accounts”.

Your FICO credit score is calculated using the following five factors:

  • Payment History – 35%
  • Amounts Owed – 30%
  • Length of Credit History – 15%
  • Credit Mix – 10%
  • New Credit – 10%

Paying on time is the most important factor in raising your credit score. In the event that you fail to pay your debts, such as credit card bills, student loan payments, and auto loans, your credit rating will suffer. It’s safe to say that payday loans aren’t an outlier.

The lower your credit score, the more difficult it is for you to get a loan in the future. For seven to ten years, a negative mark on your credit report, such as a defaulted loan, may remain. This might have a negative impact on your ability to get a mortgage or a vehicle loan in the future. If you’re looking for an apartment, some landlords may do credit checks on potential renters.

Even if you’re approved for a loan in the future, the interest rate you pay will almost certainly be greater (although not quite as high as payday loan rates). The greater the interest rate, the more money you’ll have to pay back throughout the life of the loan, and the larger your monthly payments will be. If you don’t have the money to make hefty monthly payments, this might have an impact on your finances.

Can my earnings be taken for the purpose of repaying a payday loan?

When a payday lender or other debt collector receives a portion of your salary as a result of a wage garnishment, it is known as wage theft.

Without a court order, payday lenders are unable to seize your income. If you don’t pay back a loan, the lender might file a lawsuit against you to get their money back. You might be ordered to pay back the loan money if you don’t contest the claim or if the lender wins in court. Lenders can seize earnings if they get a court order.

There is no one-size-fits-all answer, according to Drury. Consumer debt cannot be garnished in some states, such as Texas.

Is it possible that I may be sent to prison for failing to pay back a payday loan?

Every rule has a nitty-gritty. Payday loans don’t usually result in jail time, although it is possible.

When it comes to debt in the United States, Drury argues, “you can’t go to jail for it”. Fraud or theft charges might land you in jail if it is shown that you intended to default on your loan.
You might be arrested if you’re sued for failing to pay back a debt. If a judge has ordered you to appear in court, you shouldn’t skip it. See if you can’t hire a lawyer to help you with anything, even just getting ready for a court appearance or how to deal with a search order.

Is there any recourse for payday loan debtors?

If you’re having a hard time paying back your payday loan, there are a few choices you might explore.

1. Extend the loan

Many payday loan debtors choose to do this. For this reason, you will need to sign a revised loan agreement, which will include updated terms and a new interest rate. You should be able to get your finances in order for a few weeks at least.

2. Take out a personal loan

Payday loans and personal loans are not interchangeable terms. It is possible to meet the expense of repaying your payday loan by taking out a personal loan. Then you may focus on paying your personal loan installments in a way that works for you.

Even if your credit score isn’t the best, you can still get reduced personal loan interest rates. Once you’ve been approved, you may negotiate the conditions of your loan with your bank or credit union. When it comes to debt, lenders don’t want you to miss a payment as much as you don’t. When it comes to coming up with a repayment strategy that works for both sides, they’re typically quick to respond. Instead of a single payment due in a matter of weeks, your conditions allow you to repay your loan over a period of months.

3. Ask for help

Getting out of a payday loan hole may include borrowing money from family and friends.
Make a contract with your relatives if you want to show them you’re serious about asking for aid. Plan out your payback schedule, including how much you’ll pay each month and what you’ll do if your initial plan doesn’t work out. You want to show that you’re serious about your business by ensuring that both parties are satisfied with the contract.

Is it a good idea to combine all of your payday loans into one?

Consolidating payday loans necessitates negotiating a cheaper monthly payment plan with your present lender. You may not be able to receive it this way since payday lenders often need a single big sum rather than numerous monthly installments.

Debt consolidation loans are another option. If you’ve had a high-interest payday loan, you may utilize a personal loan to pay it off and then pay back the personal loan on your own terms. Home equity loans and cash advances from your credit card are additional options.

Alternatives to payday loans might be obtained by contacting a credit union. These are short-term loans that can be taken out for up to six months with a maximum amount of $1,000. Talking to your local credit union about your possibilities is a good first step in determining if this is a possibility for you.

What should I do if a debt collector is harassing me?

Once your payday loan has been in collections for several months, you may begin receiving phone calls and letters from debt collectors for payment. However, the Fair Debt Collection Practices Act (FDCPA) places restrictions on how and what debt collectors can ask of you while attempting to settle a debt.

Using abusive language or fraudulent techniques to get you to pay your debt is illegal under the Fair Debt Collection Practices Act (FDCPA). Debt collectors must stop contacting you if you ask them to do so in writing. Abuse of a debt collection agency can be reported to the Consumer Financial Protection Bureau (CFPB).

You can start repairing your finances and getting out of debt by organizing all of your payday loans. If you’re abused in any way, that’s not okay either. Correct your mistakes, get help if necessary, and improve your credit rating.

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