{"id":830233,"date":"2020-01-23T10:25:23","date_gmt":"2020-01-23T15:25:23","guid":{"rendered":"https:\/\/www.finder.com\/ca\/?p=830233"},"modified":"2026-04-14T22:30:01","modified_gmt":"2026-04-15T02:30:01","slug":"payday-loan-default-consequences","status":"publish","type":"post","link":"https:\/\/www.finder.com\/ca\/payday-loans\/payday-loan-default-consequences","title":{"rendered":"What happens if you default on a payday loan?"},"content":{"rendered":"

Perhaps you didn\u2019t have the cash on hand to repair your car or your electric bill spiked thanks to a heat wave. Maybe you didn\u2019t 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.<\/p>

If you\u2019re worried about paying it back, don\u2019t panic. Instead, get informed and learn what you can do if you risk defaulting on a payday loan. Plus, learn what steps lenders can \u2013 and cannot \u2013 legally take in Canada to get you to pay.<\/p>

What can happen if you default on a payday loan?<\/h3>

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 \u2013 which will likely result in you getting charged additional fees by both the lender and your bank. If that doesn\u2019t work, you may get calls from collection agencies and could, in the most extreme cases, end up being sued in Small Claims Court.<\/p>

And no, you can\u2019t 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 \u2013 also known as \u201cgarnishing your wages\u201d \u2013 until the debt is paid off.<\/p>

Steps a lender can take when you default on a payday loan<\/h3>

Payday loan lenders can take several steps to try and get you to repay a loan you\u2019ve defaulted on.<\/p>

1. Try to withdraw the money from your account<\/h4>

The payday loan lender can try withdrawing from your bank account using the information you provided. If the money in your bank account isn\u2019t enough to cover the payday loan payment, the lender might continue to try withdrawing smaller amounts at a time. <\/p>

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\u2019t 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.<\/p>

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\u2019t make further withdrawals without express written consent from you.<\/p>

Be sure to know your rights in the province you live in.<\/p>

2. Send your loan to collections<\/h4>

This is when the phone calls start. Lenders and collection agents will use all of the information you provided \u2013 including phone numbers at your job or email addresses \u2013 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\u2019t 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.<\/p>

It\u2019s important to realize that the lenders and collection agencies aren\u2019t 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\u2019s Office of Consumer Affairs. Keep reading below<\/a> to learn more.<\/p>

3. Go to Small Claims Court to garnish your wages<\/h4>

If your defaulted payday loan still hasn\u2019t 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.<\/p>

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\u2019ll be eager to work out a payment plan with you before getting to this point.<\/p>

  • Lenders in most provinces are not allowed to ask you or your employer to sign a document that transfers your wages directly to them \u2013 sometimes called a \u201cwage assignment\u201d form. In most cases, only a Small Claims Court judge can mandate that wages be garnished.<\/li><\/ul><\/div><\/article>

    Why is it so easy to get into trouble with a payday loan?<\/h3>

    Payday loans may seem like a solution when you\u2019re in need of quick money, but they can prove overwhelming \u2014 especially if you\u2019re 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.<\/p>

    • Easy access.<\/strong>
      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 \u201csmall fee\u201d of $14 for every $100 borrowed.<\/li>
    • Expensive fees.<\/strong>
      It\u2019s not uncommon to see payday loans with an APR over 300%. Because of this, many people end up paying off interest rather than principal and risk defaulting on a loan they can\u2019t afford. This is made worse by offers of refinancing. Lenders may offer a borrower the opportunity to \u201croll over\u201d 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.<\/li><\/ul>

      Payday loan tornadoes: getting caught in a debt spiral<\/h4>

      \"Icon<\/h4>

      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\u2019re trapped in what\u2019s known as a debt spiral or payday loan tornado. Instead of potentially defaulting on just one loan, you\u2019re 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.<\/p><\/div><\/article>