Payday loans are short-term loans with extremely high interest rates. They are meant to be paid back with your next paycheck, hence the term “payday loans”. They usually don’t involve a credit check or appear on your credit report, so they are commonly used by people with bad credit.
Many people find that they aren’t able to pay these loans on time. Failure to pay may trigger penalty fees and the interest will accumulate quickly. Collection efforts may be aggressive. If the loan is sold to a collection agency it may be placed on your credit report as a collection item, which can damage your credit. You will not be arrested for failure to pay but you may be sued, even over a small amount, and your wages may be garnished if you lose a court case. If you fail to respond to a court summons a judge could order your arrest.
A payday loan is a legal obligation and you are expected to pay. Treat these loans as a last resort and avoid them whenever possible. If you are forced to take one out, prioritize paying it off as soon as possible. Do not fall into the trap of paying a payday loan with another payday loan.
What is a Payday Loan?
Payday loans may also be called cash advances or check advances. They are available through storefronts or online. They share some common features:
- Payday loans are usually available in fairly small amounts, which may be capped by state laws. $500 is a common limit. Some states have caps as high as $1000, others have no cap at all
- Payday loans usually do not require a credit check and are available to people with bad credit. You may have to present a pay stub to confirm that you are employed.
- Payday loans are usually paid in a single installment, with interest and fees, usually on your next payday. The term of the loan is usually up to 14 days.
- Payday lenders often require that you write a post-dated check for the entire amount due or authorize them to withdraw from your bank account.
- Payday loans often have very high interest rates. You may pay from $10 to $30 for every $100 you borrow. That’s equivalent to an annual interest rate of over 400%.
Payday loans are covered by state laws and some states may offer more protection to borrowers than others. Payday loans are illegal in 12 states and the District of Columbia.
What Happens if I Don’t Pay?
Payday loan defaults are common: roughly 20% of payday loan borrowers default. Loan providers are used to defaults and they will move quickly if you fail to pay on time.
- If you have authorized your loan provider to withdraw from your bank account, they will try to do so. If you don’t have enough in your account, the attempt could trigger a charge from your bank due to insufficient funds. If they deposit or cash your post-dated check and you don’t have the funds to cover it, the bank will charge a similar fee.
- The loan provider may try to withdraw progressively smaller amounts to try to withdraw whatever amount you have on deposit. Each attempt may trigger a bank charge.
- If you are paying other bills through automatic withdrawal, the loan company’s withdrawals may not leave enough to cover those payments.
- The lender will begin calling you, sending you letters, and calling anyone you have used as a reference.
Federal laws govern collection efforts, and collectors are not allowed to threaten you. Not all payday lenders follow these laws. You can expect the most aggressive collection efforts allowed by law, and they may exceed what’s allowed by law.
The original lender may sell your account to a collection agency if you fail to pay. The original lender or a collection agency may sue you to collect. If they win a judgment against you, they may be able to garnish your wages, depending on your state’s laws.
Will My Credit be Affected?
Payday loans generally do not require a credit check. No hard inquiry will be placed on your credit report and the loan will not appear on your credit report. This is not always the case. Some payday lenders will make a hard inquiry and place the loan on your credit report. You should ask about hard inquiries before borrowing.
Because the loan is not on your credit report, your original delinquency will not be reported and will not affect your credit. However, if you fail to pay and the lender sells your account to a collection agency, the collection agency will probably report it as a collection account. This can do significant damage to your credit.
If the lender or a collection agency files a suit against you and wins, the judgment will be reported in the public records section of your credit report. It will remain there for 7 years.
What Can I Do If I Can’t Pay?
If you have a payday loan coming due, you should do everything possible to pay it on time. There are several options to consider.
- Sell Unnecessary Property
- Work Extra Hours, If You Can
- Take On Additional Work
- Cut Some Expenses
- Borrow From Friends or Family
Many payday loan borrowers make the mistake of taking out multiple payday loans or taking out another payday loan to pay the first one. That can start an uncontrollable spiral of debt.
If you have exhausted all possible ways to pay and you just can’t, negotiating with the lender is better than taking out another loan. Take the initiative and negotiate as soon as you know you won’t be able to pay. Remember that the lender would rather collect from you than sell your loan to a collection agency for a fraction of its value.
- Know your rights. Check your state’s laws on payday loans. Some states require payday lenders to offer extended payment plans to borrowers who can’t pay.
- Lenders who belong to the Community Financial Services Association of America must offer extended payment plans. See if your lender is a member.
- Approach your lender and tell them you will have trouble paying. Try to set up an extended payment plan.
- If a lender threatens you with arrest or prison, contact your state attorney general’s office.
Don’t expect the lender to be friendly or charitable. They will want their money immediately. Payday lenders are not your friends. If necessary, tell them that you’re considering bankruptcy. That will get their attention. If you declare bankruptcy, they will probably get nothing.
What Can I Do If My Loan Goes into Collections?
If your lender sells your account to a collection agency, you may face even more aggressive collection efforts. Your account will probably be reported as a collection account to the credit reporting companies, which can damage your credit.
The collection agency usually buys your debt for a small percentage of the original amount. They may be willing to settle for partial payment. If they agree to settle, get an agreement in writing before paying. If a debt is settled for less than full payment, it will be noted on your credit report.
Consider using the services of a nonprofit credit counseling agency. These agencies may be able to negotiate on your behalf and set up a debt management plan, under which you will pay the credit counseling agency and they will make payments to your creditors.
What Can I Do if I’m Sued Over an Unpaid Payday Loan?
Don’t assume that a lender won’t go to court over a small amount. Many collection cases are filed over payday loans. If a payday loan case goes to court it will usually include interest, penalties, and legal costs. Expect to be sued for an amount much larger than what you originally borrowed.
Never ignore a court summons. If you fail to appear or respond a judgment may be issued against you. You may be subject to property liens, bank account levies or wage garnishment, depending on your state’s laws. A judge may even issue a warrant for your arrest if you fail to appear.
If you can’t afford a lawyer, look for free legal clinics or legal aid providers in your area.
Avoid Payday Loans Whenever Possible
Payday loans are expensive and risky. They also have a high default rate. If you fail to pay the lender will come after you and they will not be polite or considerate.
If you need money badly look for any alternative before resorting to a payday loan. Borrow from friends or family, cut costs, do extra work. Some banks and credit unions even offer payday alternative loans to help their customers avoid the trap of payday loans. Investigate personal loan providers that serve borrowers with bad credit.
Seek credit counseling if you need it. It may be better to seek counseling before you have payday loan collectors chasing you, instead of after.
Payday loans are a last resort, but they are a common last resort. Up to 12 million Americans take out payday loans every year, and 70% of them are using those loans to pay basic expenses like rent and utilities. If you’re one of them, you should do everything possible to pay off that payday loan on time and avoid the trap of taking out one loan to pay another. Payday loans have a very high-interest rate and costs can escalate fast.
If you do default on a payday loan you can expect expensive penalties, aggressive collection efforts, and even lawsuits. It’s a lot to face, and it can be avoided. Stay away from payday loans whenever possible, and if you must use one do everything possible to pay it on time!