Payday loans are difficult to repay. Most borrowers can’t afford to hand over $500 from their next paycheck and still have enough money left for day-to-day expenses.
But if you’re thinking about defaulting and are wondering how long unpaid payday loans stay in the system, the answer depends on which system you mean.
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Our take
- There are three different “systems” where your unpaid payday loan could cause trouble: The three major credit bureaus, the minor credit bureaus and the legal system
- Payday lenders typically don’t report payday loans to the three major credit bureaus
- Once a collection agency reports an unpaid payday loan, it will stay on your credit report for up to seven years
- Payday lenders usually report unpaid loans to minor credit bureaus, where they will stay on your credit report for six years
- If you’re wondering how long an unpaid payday loan remains in the legal system, that will depend on your state’s statute of limitations on debt
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Payday loans stay in the system for up to 7 years
How long an unpaid loan will appear on your credit reports depends on which credit bureaus are involved.
If it is reported to the three major credit bureaus (Experian, Equifax and TransUnion), it will appear on your credit reports for seven years. However, payday loans are usually only reported to the major credit bureaus if you default and the loans are sold to debt collection agencies.
They aren’t usually reported to the big credit bureaus
When payday lenders check credit, they run their checks through minor credit bureaus that borrowers don’t commonly recognize. Other payday lenders will check these reports before issuing you a new loan. Any default remains on these credit reports for six years.
Everyone is entitled to one free credit report per year from each of the minor credit bureaus. Tap the links to go directly to each request page.
Unpaid loans affect your credit scores for 7 years
If your unpaid payday loan is handed over to a debt collection agency, your problems will multiply. Not only will it be listed in the payday lenders’ system, but it will land on your credit report, where it will remain for seven years. If your credit is already less than perfect, defaulting on a payday loan could further damage your credit history for years.
Pro tip: Your credit score is essential if you need a personal loan, want to rent an apartment or try to get a home loan, need to buy a car, or even apply for a job. So, if you can’t pay back your payday loan, defaulting is not a good idea. It’s best to try to find another way to repay your loan.
What are your state’s laws?
How long you can face legal action for an unpaid payday loan depends on your state’s laws.
Lenders and debt collectors have a set amount of time to sue you. This is known as the statute of limitations on debt. Statutes of limitations vary by state. It can be as short as three years or as long as ten years. Once the statute runs out, you could still end up facing a lawsuit, but as soon as you prove your debt is “time-barred” (past the statute of limitations), the suit will be dismissed.
It’s important to note that even after the statute of limitations expires, you still technically owe the money and the unpaid loan will continue to appear on your credit reports, according to William Green, owner and attorney at Delfino Green & Green. You just can’t be sued over it.
“When a debt’s statute of limitations expires, it means legally, you can’t be sued for that debt anymore,” Green said. “But don’t ignore your credit report; that debt can still hang around there, denting your credit score and borrowing ability.”
Green advises checking the debt’s age against your state’s statute of limitations. If it’s outdated, you can dispute its presence on your credit report.
What happens if you default?
A payday loan is a legally binding contract; any time you fail to abide by the contract terms, you will face serious consequences.
Here’s what will happen next:
- You’ll have to pay more in fees and interest
- The debt could be turned over to debt collectors
- Your credit score will fall
- You’ll have a harder time getting approval for new loans
- You could end up in court
READ MORE: What happens when you default on a payday loan
Pro tip: You have some protection from debt collectors, courtesy of the Fair Debt Collection Practices Act. If you think your rights have been violated, don’t hesitate to contact the Consumer Financial Protection Bureau (CFPB), FTC, or your state attorney general’s office.
You’ll have trouble getting another payday loan
For the next six years, your credit reports with the minor credit bureaus will show your initial loan amount, unpaid debt and any service fees you owe. Interest rates are high and add up quickly. Other payday lenders will know that you failed to fulfill your contractual obligation to repay.
Your only remaining loan option could be a tribal lender who is not legally obligated to follow state laws, and may end up charging you interest rates in the quadruple digits. These lenders aren’t usually concerned about past defaults.
Pro tip: Tribal lenders are the worst of the worst of all types of payday loan lenders. The big difference between tribal loans and traditional payday lenders is that conventional lenders are mandated to follow federal payday lending guidelines to ensure proper lending practices; tribal lenders are not.
Tribal lenders have sovereign immunity from federal and state laws and protection from outside litigation. It’s like having a separate country within a country that operates autonomously. Tribal loans can charge any interest rate they wish regardless of state limits, provide loans with balances higher than state minimums, and even break the terms of their loan agreements with no federal ramifications.
Try to reach an agreement with your lender
If you know you won’t be able to make your payment, call your lender and see if you can get an Extended Payment Plan (or EPP loan.)
EPP loans let you pay your loan in four installments (without incurring any additional fees) when you can’t afford to make a single lump-sum payment. In some states, you have the right to request an EPP with each payday lender at least once a year. However, you must request the EPP BEFORE your loan’s due date.
Pro tip: Most payday lenders try to discourage EPPs because they aren’t lucrative like rollovers, but in many states, they are legally obligated to provide an EPP option if a borrower requests it.
READ MORE: How to stop automatic payments on your payday loan
Avoid the debt trap
Payday loans are worse than almost any other type of loan because they are short-term, low-limit loans (generally less than $500) with high interest rates that are meant to be repaid in full from your next paycheck.
Payday loans are outlawed in several states because of their extreme predatory nature. It’s so difficult to escape the trap that more than 90% of payday loan borrowers regret their original payday loan.
Pro tip: If you aren’t completely certain that you can repay a payday loan as scheduled, you will be better off exploring a few better alternatives, including Payday Alternative Loans or a cash advance app.
Payday loan alternatives
- Payday loan consolidation programs
- Cash advance apps
- Credit card balance transfer
- Payday alternative loans
- Credit counseling
READ MORE: How to stop paying payday loans — legally
The bottom line
It’s no wonder that sometimes people need some quick cash. More than 27% of Americans have no emergency fund at all. But if you can’t repay your loan, don’t default.
Green says that being proactive about your credit health is critical.
“Regularly review your credit report for accuracy,” he says, “and address any issues promptly to secure your financial future.”
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