Payday loans are appealing to people in a tight financial spot. They’re fast and easy to take out. They don’t require a credit check, either.
But easy money comes with a price. According to the Consumer Financial Protection Bureau, a typical two-week payday loan comes with an interest rate of $15 per $100 borrowed. That’s a 400% APR.
Payday lenders target the most financially vulnerable on purpose. Doing so allows them to roll over the loan indefinitely, trapping borrowers in a vicious debt cycle. For many people, defaulting on a payday loan is almost inevitable.
Eventually, the loan balance may far exceed the borrower’s ability to pay. If you’ve taken out a payday loan that you can’t repay, here is what will happen.
Interest and Fees Pile Up
Payday lenders bet on their borrowers being unable to pay back the initial loan. That way, they can offer a “rollover”. A rollover involves your lender pushing back the loan and adding more finance charges.
If a borrower takes out a $300 payday loan with 15% interest, they’ll owe $345 in two weeks when the loan is due. If the borrower only has enough cash for the $45 finance charge, the lender may roll over the loan for another two weeks.
Over time, a $45 finance charge can turn into hundreds, if not thousands of dollars.
And if the borrower can’t pay any amount before rolling over the loan, the lender might give them another $345 loan to cover the original loan and finance charge. This can lead to a vicious debt spiral.
Automatic Bank Withdrawals
Payday lenders often persuade borrowers to give them bank information so they can withdraw the loan amount when due. Borrowers without enough cash in their account will be hit with nonsufficient funds fees.
If the lender isn’t able to withdraw the full amount in one lump sum, they may break it down into smaller transactions to get something.
The bank will charge more NSF fees for each transaction that fails. These add up fast. NSF fees can range from $27-$35 depending on the bank.
If any withdrawals are successful, the lender will empty the borrower’s bank account. Transactions the borrower makes from their checking account can bounce as a result.
Aggressive Collections Calls and Threats
After the lender attempts to get as much money as possible from the borrower’s bank account, they will sell the debt to a collections agency.
Collections agencies are much more aggressive about collecting debt. They will start calling the borrower’s home and sending them letters regularly.
With that said, borrowers cannot be arrested for failing to pay a loan. The Fair Debt Collections Practice Act bars collections agencies from threatening jail time. Borrowers threatened with arrest can report the threat to their state attorney general’s office and their state’s bank regulator.
Credit Score Damage
Payday lenders don’t check credit, nor do they report payday loans to credit bureaus.
Everything changes when the lender sends the debt to collections.
Collections agencies send information to credit bureaus. Consequently, payday loan accounts in collections show up on the borrower’s credit report.
Accounts in collections can do substantial credit score damage and stay on your report for seven years. This can make it tough to take out more legitimate forms of debt, such as a mortgage.
Collections agencies sue for even the smallest amounts of debt. Many lenders win simply because the borrower doesn’t show up to court. If they win, the court may order the debt to be collected from the borrower in a few ways.
- Wage garnishment: The court may order employers to withhold money from the borrower’s paycheck for debt repayment.
- Property lien: The creditor has claim to the borrower’s property. If the borrower sells the property, they must pay off their debt with the proceeds.
- Seizing property: In some cases, the court may order the seizure of a piece of the borrower’s property.
This is where jail time becomes a threat. If you fail to follow court orders, you can be imprisoned.
What to Do If You Can’t Pay Your Payday Loan
Things may look bleak if you can’t pay your payday loan, but you aren’t out of options. The key is to not ignore the loan. Follow these tips.
Borrowers can use their lender’s selfishness to their advantage.
Collections agencies pay payday lenders only pennies on the dollar to buy their debt accounts. If the borrower declares bankruptcy before the accounts go to collections, then the lender won’t get anything.
Consequently, a borrower can contact their lender and offer to pay a portion of the debt — such as 50% — and inform the lender they’re considering bankruptcy.
Doing so may be enough to bring the lender to the negotiating table.
Borrowers should get any agreements in writing. They should ensure the settlement contract states that the debt will be reduced to zero.
Check Your State’s Laws
Check if your lender is a member of the Community Financial Services Association of America. The CFSAA requires its members to offer Extended Payment Plans. These payment plans force lenders to give borrowers monthly payment plans without rollovers.
If the lender isn’t a CFSAA member, check your state’s laws. Several states make all payday lenders offer EPPs. Others ban or restrict rollovers. Some have even outlawed payday loans entirely.
Seek Out Community Assistance Programs
Food, shelter and other needs come first. Borrowers can seek out community assistance programs to help them cover the basics.
Work With a Nonprofit Credit Counselor
Nonprofit credit counselors offer the public free financial advice. They help borrowers improve their money management skills and avoid bankruptcy while dealing with their debt.
They can also offer advice on approaching negotiations with lenders. However, they may not be able to negotiate on the borrower’s behalf — payday lenders often refuse to work with credit counselors.
Also, borrowers should watch out for scams. Like payday lenders, credit counseling scammers prey on the financially vulnerable.
Work With a Debt Consolidation Lender
Borrowers can use debt consolidation loans to pay off high-interest debt and simplify their payments.
Trading debt for debt isn’t ideal, but a debt consolidation loan can help break free of the cycle of payday loan rollovers.