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What could happen if you default on a payday loan

Learn what lenders can and cannot do if you default on a payday loan, and how to avoid trouble by understanding the consequences of defaulting on a loan.

Perhaps you didn’t have the cash on hand to repair your car or your electric bill spiked thanks to a heat wave. Maybe you didn’t have enough to get you through until your next paycheque. Whatever the reason, the need for immediate money drove you to a payday loan lender.

If you’re worried about paying it back, don’t panic. Instead, get informed and learn what you can do if you risk defaulting on a payday loan. Plus, learn what steps lenders can – and cannot – legally take in Canada to get you to pay.

What can happen if you default on a payday loan?

If you default on a payday loan, the lender will take several steps to try and collect the debt. The lender will usually start by continually trying to withdraw payments from your bank account – which will likely result in you getting charged additional fees by both the lender and your bank. If that doesn’t work, you may get calls from collection agencies and could, in the most extreme cases, end up being sued in Small Claims Court.

And no, you can’t go to jail in Canada for defaulting on a payday loan. The worst case scenario most people could face is where a judge orders that a portion of your paycheque go directly to repay your payday loan – also known as “garnishing your wages” – until the debt is paid off.

Steps a lender can take when you default on a payday loan

Payday loan lenders can take several steps to try and get you to repay a loan you’ve defaulted on.

1. Repeatedly try to withdraw the money from your account

The payday loan lender will try withdrawing from your bank account using the information you provided. If the money in your bank account isn’t enough to cover the payday loan payment, the lender will continue to try – sometimes by withdrawing smaller amounts at a time. This won’t only get you into trouble with the lender, but your bank may also charge you overdraft fees every time your balance is insufficient when the lender attempts to withdraw money.

2. Send your loan to collections

This is when the phone calls start. Lenders and collection agents will use all of the information you provided – including phone numbers at your job or email addresses – to contact you for payments. It’s true that lenders have the right to contact your friends, relatives or employer to find a way to get in touch with you, but they aren’t allowed to give any of those people information about your loan. Also keep in mind that if your loan goes to collections, your credit score will go down.

It’s important to realize that the lenders and collection agencies aren’t allowed to hound you with phone calls. How often lenders contact you about repaying a debt is regulated in most provinces across Canada by that province’s Office of Consumer Affairs. Keep reading below to learn more.

3. Go to Small Claims Court to garnish your wages

If your defaulted payday loan still hasn’t been repaid after going to collections, then the lender could sue you in Small Claims Court. A judge can then order you to pay the lender directly, or surrender personal property in lieu of payment. The judge may also allow the lender to garnish your wages by directly taking a portion of your paycheque to pay down the debt.

Keep in mind that most lenders want to avoid the expense and inconvenience of going to court almost as much as you do, so they’ll be eager to work out a payment plan with you before getting to this point.

  • Lenders in most provinces are not allowed to ask you or your employer to sign a document that transfers your wages directly to them – sometimes called a “wage assignment” form. In most cases, only a Small Claims Court judge can mandate that wages be garnished.

Why is it so easy to get into trouble with a payday loan?

Payday loans may seem like a solution when you’re in need of quick money, but they can prove overwhelming — especially if you’re already struggling to pay off your debt. The two main components to payday loan default are easy access to money and the expensive fees that come with it.

  • Easy access.
    Payday loans are easy to get, both in person or online. All you need is ID, a chequing account and a source of income. The lender allows you to borrow a certain amount of money for a fee, and you write a post-dated cheque for the loan repayment or give the lender permission to pull funds from your bank account on your next payday. This easy access means you may not think about how much the loan costs, especially when the lender presents your interest as a “small fee” of $10 or $15 per $100 borrowed.
  • Expensive fees.
    It’s not uncommon to see payday loans with an APR of 400% or more. Because of this, many people end up paying off interest rather than principal and risk defaulting on a loan they can’t afford. This is made worse by offers of refinancing. Lenders may offer a borrower the opportunity to “roll over” the loan, but they charge a new fee each time the loan is extended. These fees lead to more money trouble, often creating debt that can last months or even years, which is why this practice is illegal in many provinces.

Payday loan tornadoes: getting caught in a debt spiral

Icon of a pig underneath an umbrella

In the face of a payday loan deadline, some borrowers may decide to take out another payday loan to keep up with fees and debt. But this only makes the situation worse. Debt swirls around the borrower. If this is you, you’re trapped in what’s known as a debt spiral or payday loan tornado. Instead of potentially defaulting on just one loan, you’re looking at defaulting on several. This can add to your debt rather than cure it, making it that much harder to pay back what you owe and get yourself on solid financial ground once more.

What can I do if I default on a payday loan?

If you’re in risk of defaulting on a payday loan, contact your lender to explain your situation and attempt to negotiate your payment terms. You may be able to enter into a repayment plan to avoid having your loan sent to collections or needing to appear in court. During this negotiation process, you should work on your budget. Find places where you can cut spending. Even if you don’t default, you’ll still need to pay the original fees you took out for borrowing.

Sometimes, though, default is inevitable. If you do receive a court summons, be sure you ask the collector to show proof that you owe the money. If they bring no proof, you may have grounds to postpone proceedings until they do.

Can I negotiate payments instead of defaulting on a payday loan?

Yes, you can renegotiate your payday loan debt. In fact, it’s generally considered a good idea to do so. This is because many lenders want something, even if it’s not the full amount. Discuss your financial situation with your lender. It may be willing to settle for less than you owe. However, be sure to get this in a written contract as a settlement agreement. This can hold up in court if your lender decides to sue for the full amount, and it may help stop any harassing phone calls from collectors and avoid fees for missing payments.

Collection agencies tactics

Collection agencies exist only to collect debts, and exerting pressure on you is a big part of their arsenal. They can be aggressive, so expect an escalation of collection attempts by:

  • Multiple phone calls at home and work.
  • Showing up in person.
  • Threatening to notify the credit bureaus.
  • Threatening to sue you.

What can I do if I’m being harassed by collection agencies?

Each province has its own laws regarding payday loans. If you’re being harassed by a collection agency, know your rights and obligations under the law, including what agencies can and can’t do when trying to collect the debt.

When dealing with a collection agency, know that it’s trying to scare you into paying whatever you can. But debt collectors aren’t legally allowed to use abusive, unfair or deceptive practices to collect from you.

Among the rules they must follow, a debt collector cannot call outside the hours of 7am to 9pm Monday to Saturday, and 1pm to 5pm on Sundays. They can’t contact you on holidays. They can’t verbally abuse you or call your friends or family to collect on a debt.

If you receive a call that violates your rights, be firm with the caller. Tell them that you know your rights and that they must stop immediately. You should then file an official complaint. Contact your province’s Office of Consumer Affairs to learn more.

See if a debt relief company is right for you

If you’re defaulting on a several different types of loans, which can include payday loans, then a debt relief company could be a good fit for you. These types of companies a evaluate your personal financial situation and come up with a plan to help you get out of debt – whether that’s through debt settlement, debt consolidation, credit counselling, consumer proposal or bankruptcy.

Name Product Costs Requirements
Varies (depends on the company you're connected with)
Have at least $10,000 in unsecured debt and a hardship that is preventing you from paying your creditors is a nationwide service that can help you find a solution to reduce your debt payments by up to 50%. Request a free consultation with a trained debt relief specialist and start your journey towards being debt-free today.

Compare up to 4 providers

Can I go to jail if I default on a payday loan?

No. According to federal law, you can’t be arrested for unpaid debt. But that hasn’t stopped some debt collectors from threatening people with jail time. This is an illegal practice, so if your lender attempts this, don’t feel threatened to comply. You may even be able to report the lender to your province’s Office of Consumer Affairs for illegal practices.

However, you can get jail time if your lender successfully sues you for assets and you refuse to comply. If a judge puts a lien on your personal property or allows a lender to garnish your wages, you’re required to abide by this decision. Not doing so can put you in a bad position that can include jail time.

Other ways to handle payday loan debt yourself

If you have multiple sources of debt, consider consolidating your debt with a personal loan lender. Online lenders and credit unions often have less stringent credit requirements than banks.

Compare debt consolidation loan lenders

Name Product Interest Rate Loan Amount Loan Term Requirements Credit Score Link
SkyCap Financial Personal Loan
12.99% - 39.99%
$500 - $10,000
9 - 36 months
Min. income of $1,200 /month, stable employment
Min. credit score: 550
Go to site
More Info
An online lender offering unsecured personal loans to borrowers with a wide range of credit scores. Apply in less than 5 minutes and if approved, receive financing in as little as 24 hours.
Mogo Personal Loan
9.90% - 46.96%
$200 - $35,000
6 - 60 months
Min. income of $13,000 /year
Min. credit score: 500

Mogo offers a 100-day money-back guarantee. If you're not happy with your loan, pay back the principal and get your 100 days of paid interest and fees back.
Go to site
More Info
An online lender who aims for a hassle-free process through same-day unsecured loan approval and funding. Get a loan fast and track your credit score for free.
Loans Canada Debt Consolidation Loan
Secured from 2.00%, Unsecured from 8.00% to 46.96%
$300 - $50,000
3 - 60 months
No min. income or employment requirements
Min. credit score: 300
Go to site
More Info
LoanConnect Debt Consolidation Loan
5.99% - 47.42%
$500 - $35,000
12 - 60 months
No min. income or employment requirements
Min. credit score: 300
Go to site
More Info
LoanConnect is an online broker that matches borrowers to lenders offering debt consolidation loans in amounts up to $35,000. Get approved for multiple loan offers from different lenders, no matter your credit score.
Fairstone Debt Consolidation Loan
19.99% - 39.99%. Varies by loan type and province
$500 - $50,000
6 - 120 months
Able to make monthly repayments on your loan
Min. credit score: 560
Go to site
More Info
Consolidate your debt up to $20,000 for an unsecured loan and $50,000 for a secured loan.

Compare up to 4 providers

Compare balance transfer credit cards

You could also consider a balance transfer credit card which can offer you a very low or no interest at all period which can help you pay down your debt.

Name Product Balance Transfer Rate Balance Transfer Fee Purchase Interest Rate Annual Fee Min. Credit Score Description
Scotiabank Value Visa Card
0.99% for the first 6 months (then 12.99%)
Min. recommended credit score: 660
Get a 0.99% introductory interest rate on balance transfers with a 0% transfer fee for the first 6 months. Apply by November 21, 2021.
BMO CashBack Mastercard
1.99% for the first 9 months (then 22.99%)
Min. recommended credit score: 660
Get 5% cash back on all eligible purchases in the first three months of card membership (up to max. spend of $2,000). Plus, get a rate of 1.99% on balance transfers with a 1% balance transfer fee for nine months.
Tangerine World Mastercard
1.95% for the first 6 months (then 19.95%)
Min. recommended credit score: 680
Earn an extra 10% cash back (up to $100) when you spend $1,000 on everyday purchases within the first 2 months. Until October 4, 2021. Plus, get a 1.95% interest rate on balance transfers for the first 6 months (valid within the first 30 days of account opening, 1% transfer fee applies).

Compare up to 4 providers

Bottom line

Payday loans are meant to tie people over until their next paycheque. But they can put you at risk of greater financial jeopardy. Consider a payday loan a last resort for true financial emergencies. After you compare your options for a payday loan, carefully review the terms and conditions of the loan, asking questions to resolve any concerns you have. And research the reputation of the lender you’re considering before signing any contract.

Frequently asked questions about defaulting on a payday loan

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