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What happens if you default on a payday loan?
Learn what lenders can and cannot do if you default on a payday loan, plus 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 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 their 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. Try to withdraw the money from your account
The payday loan lender can 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 might continue to try withdrawing smaller amounts at a time.
However, there are provincial or federal regulations in place that lenders will have to follow when it comes to withdrawing money from your account. For example, in Ontario lenders can’t continually try to withdraw payments from an account if it results in your bank charging you fees, like overdraft or insufficient fund fees. If a lender does this, you are allowed to recover these fees from them, and you also would not be required to pay the cost of borrowing the loan.
In Alberta, if a lender attempts to withdraw once and is unsuccessful because of insufficient funds, it can only make a second attempt within 30 days, and that second attempt must be the same amount as the first (plus an NSF fee). The lender can’t make further withdrawals without express written consent from you.
Be sure to know your rights in the province you live in.
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. Sometimes lenders may have the right to contact your friends, relatives or employer to find a way to get in touch with you, but if they do, 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
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.
Finder survey: How many payday loans did people get between May and July 2023?
Response
Female
Male
0
81.48%
72.2%
1
10.41%
17.26%
2
4.59%
6.28%
3
2.82%
2.47%
4 and over
0.71%
1.79%
Source: Finder survey by Pollfish of 1013 Canadians, August 2023
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.
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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
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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
Yes, and every province and territory has different laws regarding them. Make sure you know what the rules are where you live.
Often people don’t want to rely on family or pawn their possessions in a cash emergency, yet a payday loan could expose you to doing just that if you find yourself unable to repay it. Learn about alternatives to payday loans before you sign any contract.
Leanne Escobal is a publisher for Finder. She has spent over 11 years working with financial products and services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University. See full bio
Chelsey Hurst is an associate editor at Finder. She loves empowering people to avoid financial pitfalls and make better decisions with their money. Chelsey has a Bachelor of Science from Redeemer University, a Master of Science from McMaster University, and has won multiple awards for research communication. In her spare time, Chelsey enjoys cooking and taking long walks in nature. See full bio
Our comprehensive guide covers different ways you can get a loan when you have no bank account. If you decide that you need more money borrowing options and want to open a bank account, we cover the steps on how to do so.
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