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If you can't afford to make your payday loan payments, you could trigger additional fees and face serious consequences. Lenders may send your unpaid account to a collection agency, which can end up damaging your credit if it appears on your credit report.
Understanding what happens if you can't pay back a payday loan and the options available can help you decide how to handle your loan.
Consequences of Not Paying Back a Payday Loan
Failing to pay back a payday loan comes with a number of serious potential consequences, including fees, damaged credit and even legal action.
Fees and Interest Accumulation
Payday loans often come with very high fees that equate to triple-digit annual percentage rates (APRs). If you fail to repay the loan on time, late fees and interest can accumulate, making it increasingly difficult to pay back the original loan. The specific fees and rates lenders can charge vary by state, so it's important to understand your local laws.
Potential Bank Fees
Payday lenders typically require access to your bank account for repayment. When there aren't enough funds to cover the payment, you may incur overdraft or nonsufficient funds fees from your bank. Lenders may attempt to withdraw payment multiple times, leading to additional fees and increased financial hardship.
Debt Collection
After several unsuccessful attempts to collect payment, payday lenders may sell your debt to a collection agency. Collection agencies often use aggressive tactics to recover debt including frequent phone calls, letters and even emails or text messages.
Impact to Your Credit Score
While payday lenders don't typically report payments to the credit bureaus, if you stop paying, the lender may turn your debt over to a collection agency. This can result in a collection account appearing on your credit report, which can significantly lower your credit score and make it harder to get credit in the future.
Legal Consequences
In some cases, lenders or collection agencies may pursue legal action to collect the debt. This can lead to a judgment against you, which can result in wage garnishment or bank account levy.
Difficulty Obtaining Future Credit
A collection account can stay on your credit report for up to seven years, making it a challenge to get approved for new credit cards, loans, or other services that require a credit check.
What to Do if You Can't Repay a Payday Loan
If you're unable to repay a payday loan, consider these options to ease the consequences of nonpayment.
- Request a hardship program. Reach out to your lender before the due date to ask for an extension or repayment plan. Your state may require payday lenders to offer a repayment plan if you're having difficulty paying back your loan.
- Stop electronic withdrawal. To prevent bank fees, you can revoke the lender's payment authorization. Notify the lender in writing and inform your bank. You can also issue a stop payment order through your bank, but be aware that your bank may charge a fee for this service.
- Utilize service member protections. If you're an active-duty service member or dependent, the maximum interest rate you can be charged is 36%, according to the Servicemembers Civil Relief Act.
- Look for emergency cash. If you have savings or access to emergency funds, consider using that money to repay the payday loan instead of allowing the lender to attempt a withdrawal from your bank account.
- Borrow from a friend or family member. If feasible, consider borrowing a short-term loan from a relative or trusted friend to pay off your payday loan debt. Be sure to establish a clear repayment plan to maintain your relationship.
- Seek credit counseling. A nonprofit credit counselor may be able to help you find solutions for getting out of your payday loan debt.
- Avoid taking out another payday loan. While it may be tempting to borrow a second loan to cover the first, doing so can trap you in a cycle of payday loan debt.
- Roll over the loan. As a last resort, you can pay the outstanding fees to extend or roll over the loan for another term. Be aware that many states limit the number of times you can roll over a payday loan, so check your local regulations. Also, rolling over a payday loan can land you in a debt cycle that could be hard to escape. Consider a rollover only if you know you'll be able to pay off the new loan soon.
How to Get out of a Payday Loan Cycle
Finding yourself trapped in a debt cycle is stressful. Here are some strategies to help you break free.
- Avoid new loans. Taking out additional loans to cover previous ones could worsen your financial situation. Look for payday loan alternatives and focus on paying existing debts first.
- Update your budget. Review your budget to identify nonessential expenses that you can eliminate. This may allow you to put more funds toward repaying the loan and avoiding the need for a loan in the future.
- Start to build savings. Begin setting aside a small amount of money regularly to create an emergency fund. Even $20 from each paycheck could help you avoid payday loans in the future.
- Look for sources of financial relief. Investigate local community organizations and nonprofit agencies that offer financial assistance, which can help you manage your finances and escape the debt cycle.
- Increase your income. Taking on a part-time job or side hustle can bring in extra money to help you cover your expenses, repay your debt and begin building savings.
How to Rebuild Credit After Payday Loan Default
Defaulting on a payday loan can negatively impact your credit score if your lender sends your account to collections, but you can take steps to rebuild your credit once you've broken free from the payday loan cycle.
- Get current on payments. If you still have any outstanding payday loans, prioritize paying them off. You may be able to negotiate a lower payoff amount, even if the loan has gone to collections.
- Pay your bills on time. Make sure you stay current on all your other financial obligations to prevent them from going into default, further damaging your credit. Your debt payment history is the most important factor in your credit score calculation, making up 35% of your FICO® Score☉ , the score used by 90% of top lenders.
- Monitor your credit regularly. Keep an eye on your credit to understand what affects your score. You can use a credit monitoring service such as Experian's, which will notify you of changes to your credit report. If you find inaccuracies on your credit report, you have the right to file a dispute with the credit bureaus to have them corrected or removed.
- Build positive credit. Making timely payments on your bills and credit accounts could help improve your credit score. Consider opening a secured credit card to build credit if you don't already have a credit card (just be sure to keep your balance low and make all payments on time). Another option is becoming an authorized user on a friend's or family member's existing credit card. You can benefit from their credit history, so be sure to choose someone you know uses their credit card responsibly.
- Pay down existing debt. Work on reducing your credit card balances. A lower credit utilization ratio can positively impact your credit score.
- Limit new credit applications. Avoid applying for multiple new credit accounts in a short period, since each new application adds a hard inquiry to your credit report, which can temporarily lower your credit score a few points. Space out opening new accounts over the course of several months, and only apply for credit if you really need it.
Frequently Asked Questions
No, a payday lender cannot directly freeze your bank account. However, if they take legal action and win a lawsuit against you, the court can issue a judgment against you. Once they have a court judgment, the lender can ask the court for permission to garnish your bank account to satisfy the debt.
This process involves several legal steps, and you would have the opportunity to respond to and pay the debt before your account garnishment occurs.
No, you can't go to jail for not paying a payday loan. In some cases, you could be in contempt of court if you fail to follow certain court orders. This could lead to an arrest, but it would be for disobeying the court's instructions, not for the unpaid loan.
The statute of limitations on payday loans—the legal time frame that a lender can sue you for an unpaid debt—varies by state and typically ranges from three to six years. The loan doesn't go away after the statute of limitations expires; however, you have a legal defense if a lender sues you for an expired debt.
The Bottom Line
When you can't pay back a payday loan, taking proactive steps to address the debt can help you avoid serious consequences. Talk to your lender right away to explore your options before you fall behind on payments. This can help you keep the loan out of collections, which can prevent further legal action and protects your credit score.