What Happens If You Don’t Pay Back a Payday Loan?

If you don’t pay back your payday loan, your lender will charge you fees, send your debt to collections and the default may take steps to recover the funds by filing a lawsuit.

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What Happens After You Miss a Payday Loan Payment?

Defaulting on a payday loan will push your lender to start collecting on your debt.

First, the lender will assess a late fee, and then because they have access to your bank account, withdrawal attempts to collect on the debt will begin.

If your lender repeatedly tries to collect on the debt by withdrawing from your account, your bank could charge insufficient funds or overdraft fees. If this continues and the lender isn't able to collect the funds, the debt could be forwarded to a collection agency.

The timeline for doing so may vary by state and lender.

Is There an Immediate Financial Impact? What You Should Know

Once you default on your payday loan, you'll likely face several financial consequences, such as:

• Late fees: The lender will charge late fees once your scheduled payment amount is past due.

• Rollover fees: If you’re granted an extension to pay your debt beyond the payment deadline, the lender will charge you a fee.

• Repeated ACH withdrawal attempts: The lender has authorization to make attempts to collect the debt from your checking account. They may continue to make multiple attempts to withdraw the funds that are owed.

• Multiple overdraft/NSF fees: Each unsuccessful attempt to collect the money from your bank account may result in multiple overdraft and NSF fees.

• Loan balance will grow quickly: You’ll pay not only the original amount of the payday loan, but also all the fees associated with the overdue payment.

A tip: Bank fee stacking is when each failed attempt to collect from your bank account causes a separate fee. Every attempt to withdraw from your checking account can result in a separate NSF fee.

How Unpaid Payday Loans Can Affect Your Everyday Finances

Unpaid payday loans may impact your everyday finances. This debt may be placed on your credit report, you could be sued and your bank account could be closed.

Credit Reporting and Collections

Payday lenders don’t typically report your overdue payment amounts to credit bureaus. However, if your debt is at a collection agency, this activity will appear on your credit report. A collection account on your credit report will make it hard for you to get a new loan or credit, and it will make it hard to qualify for certain financial services.

A delinquent account in collections can remain on your credit for seven years from the date of the original delinquency. This collection account will remain for that time period even if the debt is settled or paid.

Can a Payday Lender Sue You for Unpaid Debt?

The lender will attempt to collect the past due amounts. Initially the lender will call, send texts and emails to let you know of the debt. As a part of this collection activity, the lender may send a demand letter. It's a formal request that you repay the debt.

If the debt remains unpaid, the lender or the collection agency may file suit to collect the past due amount. Keep in mind, filing a lawsuit is an option, but not automatic. If a lawsuit is filed, don’t ignore official court notices. This may make your legal situation worse.

If you don't respond, the court may file a default judgment against you. This lawsuit is filed in civil court, and if the lender wins, your wages may be garnished — in other words, taken out of your bank accounts. A wage garnishment requires a court order.

How It Can Disrupt Your Day-to-Day Banking

The consequences from your unpaid debt results in disruptions in your everyday banking. Here’s what may happen:

• You'll have repeated overdraft fees. This will likely raise questions from your bank.

• You'll risk having your bank account closed. Your bank may choose to close your account if you don’t address the overdraft and NSF fees.

• You'll likely face frozen access to funds. You will lose access to direct deposits, and automatic bill payments may stop.

• Opening a new account may be hard. ChexSystems is an agency that tracks closed accounts or unpaid fees. A bank reviews information from this agency to determine if you can open a new account.

What To Do if You Can’t Repay a Payday Loan

1. Get Control of Automatic Withdrawals

When you sign up for a payday loan, you authorize the lender to automatically take money from your account to pay the debt. This process is called ACH authorization. However, if you're unable to make the payment, you may revoke ACH authorization. You can do so by sending a written notice to the lender specifically revoking ACH authorization.

Also, contact the bank and ask for a stop payment or ACH block so that the lender is prevented from making these withdrawals. You may choose to close your account, but be aware that this will stop your direct deposits and automatic bill payments.

2. Ask About an Extended Payment Plan

You can request an extended payment plan. This plan allows you to make installment payments instead of one lump sum payment. You can make this request before your loan goes into default. In some states, lenders are required to offer this option to borrowers.

An extended payment plan is different from a rollover. An extended payment plan is a structured agreement over a period of time. A rollover is an extension that may incur fees. Don't wait until the last minute to contact your lender about an extended payment plan.

3. Consider Lower-Cost Alternatives

Here are some low cost alternatives to pay for your outstanding debt:

• Credit union small-dollar loans: Credit unions will allow you to take out a short-term loan that has lower interest and a structured payment plan.

• Employer paycheck advances: Certain employers allow you to access your wages early to help you cover short-term expenses.

• Nonprofit credit counseling: Certified credit counselors can review your finances and help you come up with a plan to repay your debt.

• Debt management plans: A financial counselor can help you consolidate your payments and work with creditors to establish a plan.

• Negotiated settlement: In certain cases, you may be able to negotiate a settled amount with the lender or collection agency.

4. Know Your Consumer Rights

Even though you have an unpaid and overdue debt, you are still entitled to your rights. The Federal Debt Collection Practices Act (FDCPA) prevents lenders and creditors from harassing you to collect the debt. They cannot call you repeatedly to get paid. You have the following rights:

• You can ask for written documentation regarding the amount and the creditor involved.

• You have the right to dispute inaccurate information on your credit report.

• You can request the incorrect information be corrected on your credit report

Final Take

If you've not repaid your payday loan, prepare for the financial consequences. However, if you act early enough by asking for an extended pay plan before your loan goes into default, you can reduce the long-term damage. You can also contact the lender or collection agency to see if you can settle the debt for less than the amount owed. Yes, you have an unpaid loan, but there are options to help you course correct.

FAQs

How long can a payday loan stay in collections?

A payday loan can stay in collections as long as the debt is still unpaid, until it’s settled or the lender stops trying to collect the unpaid amount.

Can you negotiate or settle a payday loan?

You can settle or negotiate a payday loan. It can be settled for less than the amount due.

Sources:

• Consumer Financial Protection Bureau (CFPB). "Could I be arrested if I don't pay back my payday loan?"

• Federal Trade Commission (FTC). "Fair Debt Collection Practices Act."

• CFPB. "Payday loans."

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