Prevention is best. Avoid trouble by understanding the consequences of defaulting on a payday 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 resources to get you through until your next paycheck.
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.
Why is it so easy to get into trouble with a payday loan?
Payday loans are easy to get, either in person or online. You just need an ID, a checking 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 check for the loan repayment or give the lender permission to pull funds from your bank account on your next payday.
It’s not uncommon to see these loans with APRs of 400% or more, making it easy for a borrower to end up with only the money to pay interest or defaulting on the loan. Before defaulting, borrowers may try to “roll” over the loan — essentially renewing the loan — but are charged 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.
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.
What happens if I don’t pay back a loan?
As the lender tries to collect your debt, they continue to try withdrawing from your bank account, using the information you provided. If the money isn’t there, they continue trying, sometime breaking up the loan into smaller parts. 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.
And this is when the phone calls start. Lenders and collection representatives will use all of the information you provided — phone numbers at your job, email addresses, and even family members or friends — to contact you for payments.
Find out if short term loans cause bankruptcy and how to avoid defaulting
Can a lender send me to collections?
Yes. Though a payday lender would rather squeeze the money out of you directly, they can and do turn to third-party collection agencies and often very quickly — sometimes within 30 days of your missed repayment deadline.
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.
Can I go to jail if I can’t repay a payday loan?
Not exactly. According to federal law, you cannot be arrested for unpaid debt. That hasn’t stopped some debt collectors from threatening people with jail time. If this happens to you, consider reporting them to the Consumer Financial Protection Bureau.
You can, however, get jail time if your lender successfully sues you for assets and you refuse to comply.
What can I do if I’m being harassed by collection agencies?
Each state and city has its own laws regarding payday loans. If you’re being harassed by a collection agency, your most important step is to become informed about 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 they’re trying to scare you into paying whatever you can. Instead, stand firm when dealing with these aggressive collectors.
The Fair Debt Collections Practices Act is a federal law that prohibits debt collectors from using abusive, unfair or deceptive practices to collect from you. Among the rules they must follow, a debt collector cannot call outside the hours of 8 a.m. to 9 p.m., call you at work, 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. And then register a complaint with your state’s attorney general or the Consumer Financial Protection Bureau.
Can a lender garnish my wages?
Yes, but only if a court has so ordered it. If a judge rules against you, the collection agency, depending on your state’s laws, can levy your bank account, garnish your wages or put liens on your property. In many states, these orders can remain in place for up to 10 years.
What can I do if I default?
If you find yourself at risk of defaulting on a loan, try to get ahead of the situation before it spirals out of control. Get in touch with your lender first to explain your situation and attempt to negotiate your repayment terms. You may be able to offer entering into a repayment plan to avoid appearing in court. If you do receive a court summons, show up in court and ask that the collector show proof that you owe the money. If they bring no proof, you may have grounds to postpone proceedings until they do.
Payday loans are meant to tie people over until their next paycheck. But they can put you at risk of greater financial jeopardy. Consider a short term loan a last resort for true financial emergencies. After you compare your options for a short term 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
Are payday loans regulated?
Yes, and every state has different laws regarding them. For information on your state’s laws, check out our guide on payday loan laws by state.
Besides payday loans, where else can get money if I’m short on cash?
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.
Who can I turn to if I need assistance regarding payday loan harassment?
Contact the Consumer Financial Protection Bureau, a government agency that protects consumers. If you’re being threatened for nonpayment, contact your state attorney general and file a complaint with CFPB.