Payday loans may seem like a quick fix if you’re short on cash. These short-term loans can cover upcoming bills, car repairs, or other sudden emergencies. But what happens if you don’t pay a payday loan?
Defaulting on a payday loan can have several consequences, including fees and even damage to your credit. Understanding how payday loans work and your alternative options to repay the loan or get financial relief can help you avoid defaulting on your loan.
What is a payday loan and how does it work?
Payday loans are short-term, high-interest loans designed to provide quick funds until your next paycheck. They’re typically easy to obtain, requiring minimal documentation and generally no credit checks.¹ However, their ease of access and fast approval process come with a cost – high fees and interest due to the increased risk to the lender.¹
So, how do payday loans work? Lenders look at your income and paycheck history to see how much you can afford to borrow and repay by your next payday. These cash advance or cash back loans can make it easier to borrow directly from your future paycheck, though with the addition of unusually high fees. Payday loan interest rates can be as high as 400% and states set maximum loan fees ranging from $10 to $30 for every $100 borrowed.¹
Most payday loan lenders allow you to borrow a maximum of $500, depending on the state.² However, these loans are prohibited in 18 U.S. states, as well as the District of Columbia.³
What happens if you don’t pay back a payday loan?
Before considering a payday loan or any type of loan, you should determine whether you can afford to pay the loan back on time. That said, unexpected circumstances can still come up, leaving you unable to keep up with loan payments. Defaulting on your payday loan can lead to several consequences.
You’ll likely be charged fees
One of the immediate consequences of not paying back a payday loan is being hit with fees. Lenders often charge late fees once the initial repayment period has lapsed. Your bank may charge a non-sufficient funds fee if the lender attempts to collect payment and you don’t have the funds in your account to cover it.⁴ These fees can accumulate quickly, making it even more challenging to repay the loan.
The added fees will increase the initial loan amount. For example, a $500 loan can easily balloon to $700 or more within a month due to late fees and additional interest.
You may be offered a rollover or renewal
If you’re unable to pay back your payday loan, lenders may offer you a “rollover” or renewal option. This means extending the loan’s term in exchange for an additional fee. While this might seem like a temporary solution, it often leads to more debt.⁴
Rolling over a payday loan means you’re taking out another loan (with an additional loan fee) to pay off the first one, adding more interest and fees to your initial debt. This can create a cycle that’s difficult to escape, turning a temporary financial fix into a long-term burden.
There may be collection calls
Failing to repay a payday loan can lead to relentless collection calls. Lenders will often turn to collection agencies to recover their money, who can be aggressive in their methods. This can add stress to an already difficult financial situation.
Debt collectors have various ways to contact you, whether through phone calls, emails, or mail. These persistent attempts can disrupt your daily life. Knowing your rights regarding debt collection can help you manage these interactions better.
The Fair Debt Collection Practices Act (FDCPA) is enforced by the Federal Trade Commission and states that debt collectors can’t not lie to you about a debt or speak to you harshly.⁵ Collectors also can’t call you before 8 am and after 9 pm. They must provide validation or proof of the debt you owe if you request it when they initially contact you.⁵
You can get sued by the lender
In extreme cases, failing to repay a payday loan can result in legal action. Lenders may file a lawsuit against you to recover the debt, which can lead to wage garnishment, seized assets, or other legal consequences.⁶
Legal actions are the last resort, but they do happen. Understanding the legal implications of taking out a payday loan with a particular lender can help you take proactive steps to limit those risks.
How do you negotiate with a payday lender?
Negotiating with a payday lender is an option if you cannot repay the loan and express this to your lender early on. Start by contacting the lender directly to explain your situation and explore possible repayment plans or extensions that might be available.
Some lenders may be willing to negotiate because they prefer receiving some payment over none at all. You can request a lowered interest rate, an extended repayment period, or even a settlement amount that’s less than what you owe. However, there’s no guarantee that they’ll agree to your terms.
Document all communications with the lender, and try to get any agreements in writing. This ensures that both parties are clear on the terms and reduces the risk of misunderstandings later.
What are other alternatives if you can’t pay a payday loan?
If you can’t pay a payday loan, there are several alternatives to consider.
1. Apply for a peer-to-peer loan: This is an online loan when you borrow money from individual investors rather than a traditional lending institution. These loans can be offered by third-party peer-to-peer lending platforms and work similarly to personal loans since you will still need to meet certain income and credit requirements depending on the loan amount you wish to borrow.⁷
2. Get a debt consolidation loan: Debt consolidation loans are used to pay off multiple debts, including payday loans since you can combine your existing debt payments into one loan with one interest rate. For example, if you end up with multiple credit card balances, switching to a single monthly payment can help simplify repayment and potentially lower your interest rates.
3. Consider a short-term emergency loan: Some banks and lenders offer short-term emergency loans with competitive rates and more flexible repayment terms. A common type of emergency loan is a personal loan, which typically offers lower interest rates than a payday loan.
4. Enroll in a debt management plan (DMP): Credit counseling agencies offer free or low-cost services to help people manage their debt and finances.⁸ They can provide budgeting advice, debt management plans, and assistance negotiating with creditors.
A debt management plan is a structured repayment plan managed by a credit counseling agency on your behalf. They can negotiate with creditors to potentially lower interest rates and create a manageable repayment plan.⁹
Avoid costly payday loan fees and protect your credit score
Payday loans can provide quick financial relief in emergencies but have significant risks and consequences if not managed carefully. Payday loans for bad credit are common since lenders will have more lenient requirements. However, consider these loans a last resort due to their high fees and interest rates.
As with any loan, you should budget to make payments on time and avoid late or missed payments since this could lead to fees, damage your credit, or even result in calls from collections or the lender taking legal action.
When you create a Chime account, you automatically get your paycheck up to 2 days early when you set up a qualifying direct deposit.