Defaulting on a Payday Loan

If you’re anxiously waiting on your next paycheck but need money fast, one question might pop into your head: “Is getting a payday loan a good idea?”

Quick answer: Only if you’re really desperate and don’t mind being taken advantage of.

Payday loans are the definition of predatory lending. If you pay it back, you’ll still be gouged on interest rates. If you default, lenders have many ways to recoup the money and leave you far worse off than you started.

That said, these tough economic times have left some consumers feeling they have to take the payday loan plunge. But one in five borrowers don’t repay the loan, according to Bankrate. Here are some things you should know if you default.

Can You Go To Jail For Not Paying A Payday Loan?

Payday loans are typically for $500 or less. That’s peanuts to the legal system, so you won’t be thrown into the clink if you default.

However, there is a big “but” attached to that. Lenders can and probably will take you to court. If you are ordered to appear there and don’t show up, a judge could issue a lien judgment against you or possibly issue a warrant for your arrest.

Even if you don’t have to appear in court, you’re hardly off the hook. If the judge rules against you, lenders will start pushing all sorts of legal buttons that will further your financial woes.

How Payday Loan Lenders Recover Outstanding Debt

A big allure of payday loans is they usually don’t require a credit check. But the way lenders look at it is, “Who needs a credit check when we’re getting vital bank information?”

Before you receive your money, you’ll either have to write a postdated check for the loan amount, or you’ll have to provide electronic access to your checking account.

When the loan is due, the lender will cash the check or withdraw the loan amount from your account, and you’d better have enough money in the bank to cover the withdrawal.

Fees and Interest

The lender isn’t going to just walk away if your check bounces. It will keep trying to withdraw the money. Each time the payment is returned for insufficient funds, the bank will hit you with an overdraft fee. Those average $35. Yikes!

Some payday lenders also charge late fees for every missed payment, so you can get mired in overdraft quicksand pretty fast.

Borrowers can sometimes delay repayment for an additional fee. For instance, if you borrow $300 for a $45 fee, you can extend the loan until your next payday for an additional $45.

The bottom line is you’ll owe the original $300, plus $90 in fees. That’s legalized highway robbery.

Double yikes!

Debt Collection Tactics

When it comes to public favorability, debt collectors rank somewhere between politicians and Amway salesmen. If you’ve ever dealt with one, you know why.

They typically buy bad debt from companies for pennies on the dollar, then recoup what they can by hassling you with phone calls, texts, emails and letters.

It’s important to know your rights with debt collectors. One thing they can’t do is threaten you with jail for not repaying your loan, though some lenders might try to use bad-check laws against you.

That’s also illegal, and you should contact your state’s attorney general’s office if anyone makes such a threat.

Court Summons

You can try to avoid debt collectors. You can’t escape the legal system.

The lender or its debt collection agency might take you to court. If they win, your debt could be recovered through wage garnishment, property liens or bank account levies.

If you don’t appear at the hearing to present your side, you almost certainly will have a judgment against you. Furthermore, if a judge orders you to appear, you’ll risk jail time if you’re a no-show.

Even if you aren’t mandated to be there, it’s a good idea to appear in court. A no-show means the lender will win by default.

A borrower can also ask for proof they owe money. It’s not unheard of for the lender to be unprepared for that and lose the case.

Your Credit Score Will Suffer

Payday lenders don’t check your credit score, but a defaulted loan will definitely impact it. There are three major credit bureaus – Experian, Equifax and TransUnion. A major component in all of their scoring is paying loans on time. Failing to do that could lower your score 100 points or more.

Difficulty Securing Future Financing

Non-payment on a payday loan is bad news for your credit score. That stain stays on your credit report for seven years.

A good credit score will get you lower interest rates on loans and credit cards. That could save thousands of dollars on a car loan, or tens of thousands of dollars on a mortgage.

Defaulting on a payday loan means you’ll likely kiss such future savings goodbye for a long time.

How To Negotiate with a Payday Loan Lender

Payday lenders are business people, and good business people are open to negotiation. Instead of going to court or selling your debt to collectors, they might be willing to settle your debt for a discount.

As a starting point, tell them you want to pay them back, but the best you can do is offer them 50% of what you owe. Mention that you are considering filing for bankruptcy.

That would mean they’d likely get nothing, a prospect that might motivate them to agree to a settlement. If they do, get the agreement in writing, and make sure it states your debt has been paid in full.

Options If You Can’t Repay A Payday Loan

You might be tempted to move to Ecuador or change your identity if you can’t repay the loan, but there are better options. Among them are:

• Debt consolidation loans: All your debts are combined, and you get a loan to pay them off at lower interest rate than you previously paid. It’s tough to get such a loan if you have a suboptimal credit score, but debt consolidation is worth a try.
• Borrowing from friends or family: Nobody wants to hit up acquaintances for money. But you have a wealthy or sympathetic Aunt Gladys or Uncle Harry, it’d probably be better to deal with them than a debt collector.
• Credit counseling: This is a free service offered by nonprofit credit counseling agencies. It may help you create a budget that keeps you from needing payday loans to pay bills.
• Bankruptcy: Filing for bankruptcy can erase many of your debts, but it has serious financial implications. It’s probably not worth it to get rid of one bad payday loan. If you’re buried in debt, it’s worth considering. Do your research and know what you’re getting into.

Get Help with Your Financial Situation

You probably won’t go to jail if you default on a payday loan, but you will still be in a financial prison. One potential way out is to talk to certified credit counselors at a nonprofit like InCharge Debt Solutions.

They might recommend a debt management program or other strategies to steer you through tough financial times. With some financial discipline, you’ll never have to mess with payday loans again.