What happens when you can’t pay off a payday loan?

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You have been made redundant but you still have to pay rent. You’re running out of payment for your car and need a little extra help. Your electricity has been cut off and you must find a way to pay your overdue bill to turn it back on.

Sometimes you need a little cash to get by. So, you get a payday loan and solve your bills. But what happens when you can’t pay off a payday loan? Here’s what to do if you get caught up in that borrowed pickle.

What is a payday loan?

A payday loan is a short-term loan taken out for a small amount, usually $ 500 or less. Depending on the state laws, you can get personal loans payday loans in person or online.

You take out a payday loan by writing a post-dated check for the full balance, including fees and interest that will add up when the loan is due. You can also allow the lender to automatically debit your full bank account balance on the due date.

Payday lenders can charge hefty fees in exchange for the money you borrow. Mike Sullivan, personal finance consultant for credit counseling agency Take Charge America, said the APRs are around 400%. It can be difficult to stay up to date on your bills and your loan with such a high interest rate.

“A 14-day $ 200 loan may require a payment of $ 235 or $ 35. [in] interest, ”Sullivan said. “Borrowers usually focus on the payment amount and ignore the full cost. “

What happens when you can’t pay off a payday loan?

According to The Pew Charitable Trusts, Americans spend $ 30 billion a year to borrow from payday lenders and other small lenders. So if you have taken out a personal loan and are struggling to pay it back, you are not alone. Payday loans disproportionately affect underserved communities, where individuals might not have the resources to use traditional financial institutions, such as banks and credit unions.

“Payday loans are typically taken out by people with very poor credit who cannot find money for immediate needs, such as food, gas or rent,” Sullivan said. “These borrowers often have no other options for borrowing.”

When you take out a payday loan, many lenders don’t check your credit or care about your financial situation. If you don’t have stellar credit, this might sound like a good thing. But that will only send you into deeper financial despair.

“Payday loans are a trap, and there’s not much a borrower can do when trapped,” Sullivan said. “At some point, these loans often become unbearable and the borrower defaults.”

Default is when you can’t pay off your loans on time. This can lead to a drop in your credit rating, garnishment of your salary, and high interest rates on future loans. Your loan could also be turned over to a debt collector, who will work to get you paid off all of your debt. Do your best to avoid defaulting on your payday loans.

What to do if you can’t pay off your payday loan

If you’re struggling to get out of the payday loan cycle, here’s how to get out of it.

1. Check your debt

Review all your debts, from your payday loan to overdue bills. Focus on those with the highest interest rates. With high rates, the longer you take to pay off the debt, the more money you will end up paying.

2. Extend your repayment plan

Ask your lender for an extended payment plan, which is usually granted if your lender is a member of the Community Financial Services Association of America. However, you must apply for an extension before the last due day of your loan.

You will also sign an amendment to your loan agreement. Read it and make sure you understand the new terms and interest rates you agree to. You may be able to get a few extra weeks to pay off your loan.

3. Consider a personal loan

Don’t be afraid of the big banks, at least not when it comes to personal loans. Payday loans and personal loans may look similar, but they are not the same. Make sure you know the difference between personal loans and payday loans.

Taking out a personal loan can help you pay off your debt. These loans have much lower interest rates and longer repayment terms than payday loans. If you have poor credit, you’ll be happy to hear that you can even find personal loans for credit scores below 550.

4. Try a credit union

Credit unions and payday lenders have a lot in common. You can usually find one near you that offers small payment loans that can help you make large payments. Many credit unions have Alternative Payday Loans (ALP) for members.

Although you need to be a member of a credit union for at least a month, you can get anywhere from $ 200 to $ 1,000 with terms of one to six months. The interest rate for a PAL is much lower than the interest rate for a payday loan, up to 28%.

5. Get help

When you’re in a tough spot, it’s always a good idea to get help, whether it’s a credit counselor or a co-signer on a loan. Asking for help is an important step in getting started.

You can get help from the National Federation of Credit Counseling. Make an appointment with someone who can directly assess your financial situation.

If you are trying to get a personal loan and your credit score is not good, you may want to find a co-signer. A co-signer can be helpful, but remember that the loan will impact both of you. You both need to be careful when taking out a loan together.

If you have friends and family who can help in a pinch, use their resources. It is much easier to repay loved ones than a payday lender.

Find your freedom

You could consider a payday loan, but you don’t need it. When you cannot pay off a payday loan, there are many alternatives that you can consider. If you already have one, be careful and know your rights. Explore ways to pay it off as soon as possible so you don’t get trapped in debt.

Forget about filling out tons of forms. Finding your best personal loan rate is now easier than ever.

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Student Loan Hero is indemnified by the companies present on this site and this compensation may have an impact on how and where the offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the market.

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A default on a payday loan can result in bank overdraft fees, collection calls, damage to your credit scores, a day in court, and garnishment of your paycheck.

Don’t think that it can’t happen because you only borrowed $ 300.

“If you have a valid, binding legal agreement to pay off this debt and you are in a state where they can sue you and garnish your wages, you are playing a chicken game that you are going to lose. Said Bruce McClary, spokesperson for the National Foundation for Credit Counseling.

If you cannot refund a payday loan, you could pay off debt for less than you owe, or file for bankruptcy if your debts are overwhelming. Here is what you can expect.

Bank withdrawals and collection calls

Payday lenders don’t waste time when the money you owe is owed.

They will immediately withdraw the money from your bank account if you have given them access to it under the loan agreement. If the debits are not made, they can break the charges into smaller pieces in an attempt to extract the money that is in your account.

 

Each unsuccessful attempt may trigger bank charges against you. Successful attempts could drain your bank account and bounce other transactions, resulting in fees as well.

At the same time, lenders will start calling, sending letters from attorneys, and contacting relatives or friends that you used as references when you took out the loan. Under federal law, lenders can only ask for help locating you – they cannot reveal where they are calling from unless asked or explained to someone about your debt situation. is.

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Jail time? No, but threats are common

Failure to repay a loan is not a criminal offense. In fact, it is illegal for a lender to threaten a borrower with arrest or jail. Nonetheless, some payday lenders have been successful in using bad check laws to file criminal complaints against borrowers, with judges falsely approving the complaints.

 

The Consumer Financial Protection Bureau advises anyone threatened with arrest for non-payment to contact their state attorney general’s office. You should never ignore an order to appear in court, even if the criminal complaint was filed in error.

A chance to negotiate

A lender would rather collect money directly from you than sell your debt to an outside collection agency. Third-party debt collectors may only pay pennies on the dollar to buy your debt. If you can, start by offering 50% of what you owe to pay off the debt.

 

“Tell the lender, ‘Look, I just can’t pay you and I’m considering bankruptcy,’ says John Ulzheimer, a credit expert who has worked for the credit rating company FICO and the Equifax credit bureau. “As soon as you start using the word BK they get very serious because BK means they get nothing.”

Get a written agreement and make sure the document says your balance will be reduced to zero. In official terms, you want the debt to be “exhausted”.

If you are unable to settle, make sure you know how to deal with debt collectors and what practices are illegal. For example, debt collectors can’t call you over and over again or make false statements or threats about how much you owe.

Summons to court

If you think collection agencies don’t bother to sue for small amounts, think again.

Almost all of the lawsuits against consumers today are for relatively small amounts, says Michael Bovee, president of Consumer Recovery Network, a debt settlement company.

Lenders typically win because consumers do not appear in court, according to a 2020 analysis by Pew Charitable Trusts. The judge then makes a default judgment and the court can start collecting the money you owe on behalf of the collection agency.

“Under your state’s law, you are exposed to land liens, bank account levies, and wage garnishment,” Bovee explains.

You should never ignore a lawsuit, says Lauren Saunders, associate director of the National Consumer Law Center.

“Go to court and ask them for proof that you owe them money, because often they show up without proof,” Saunders says.

Other options if you can’t pay a payday loan

You shouldn’t prioritize paying the payday lender over putting food on the table or paying the rent, says Saunders.

No need to apply bankruptcy on top of a small debt, but you might want to consider it if your unsecured debt – including payday loans, credit cards, and medical bills – adds up to half or more of your income.

Don’t delay and hope the debt will magically disappear – it doesn’t. “Time never makes debt go away,” says Ulzheimer. “Bankruptcy does it.”

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