What Happens if you Default on a Payday Loan?

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Defaulting on a payday loan can rack up interest and fees, trigger debt collection calls and even result in wage garnishment. Read along to explore the consequences and alternatives of default.

Key points

  • You’ll accrue interest and fees
  • Your credit score will fall
  • You may end up in court
  • Before defaulting, contact your payday lender and ask for an extension

Stuck in payday debt?

DebtHammer may be able to help.

What happens if you close your bank account and default on a payday loan?

If you don’t pay back your loan, it is classified as a default and will lead to a whole host of troubles, including fees, finance charges, collection calls and harassment. Plus, your credit score will take a hit. Here’s what you should expect to happen:

1. You’ll pay even more interest and fees

The full amount of the loan and any fees are typically due within 14 days or by the time of the borrower’s next paycheck. Lenders will allow you to continue the loan and add even more fees to the original amount if you don’t have the money to pay it back. The average annual percentage rate (APR) on a payday loan is over 500%, meaning if you are unable to pay back the loan, the amount you owe can add up quickly.

2. Debt collectors will contact you

If you close your account or remove your payday lender’s access, they’ll waste little time trying to get their money back. They likely will hand your loan over to a collections agency. Expect to be contacted in a variety of methods. They could call you, send letters from lawyers requesting payment and, depending on the debt collector, may even contact relatives or friends you used as references when you took out the loan. 

Remember that the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) limit how far lenders can go to collect their money. For example, lenders can’t excessively call you, disclose private information to individuals other than you or tell you dishonest information about your loan. Research the federal laws. If you feel your lenders have tried to take inappropriate action against you, please report them to the FTC, CFPB or your state attorney general’s office. Payday loans are outlawed or strictly regulated in many states. Make sure you know your state’s laws.

3. Arrest threats

In addition to intimidation tactics, lenders may claim they will send the police after you. It is illegal for a lender to threaten a borrower with arrest or jail, no matter what they tell you. If the lender oversteps any action they’re legally allowed to take, once again, the CFPB and your state attorney general might be able to help.

4. Your credit score will take a hit

Payday lenders don’t usually check your credit score before issuing loans, but your score will certainly take a hit if you don’t repay them. Your credit score is a number used to determine how likely you are to pay off your debts. There are three major credit bureaus: Experian, Equifax and TransUnion. Paying your loans on time is one of the biggest components of your credit score. One late payment can lower your score by 100 points and stay on your credit report for up to seven years.

Unfortunately, this can also make it harder for you to qualify for future loans, such as an auto loan or mortgage. To prevent this, avoid payday loans unless you know you can pay back the loan amount immediately. 

How long does an unpaid payday loan stay in the system?

Unpaid payday loans may stay on your credit report for up to six or seven years or more, depending on the statute of limitations in your state.

Again, most payday loan lenders don’t look at your credit score and most likely won’t alert the nationwide credit reporting companies when they give you a loan. But, just like any lender, payday lenders keep records and defaulted payday loans will remain on your credit report for six years. And this default gets reported and affects your credit score. If your credit is already less-than-perfect, defaulting on a payday loan could damage your credit history for several 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, finding another option is best before turning to a payday lender if you can’t repay your payday loan. If your credit score is already in the dumps, then consider trying different tactics to improve your credit score.

5. You might receive a court summons

Never ignore an order to appear in court, even if the lender is in the wrong. Not showing up is the quickest way for the lender to win, leading the judge to enter a default judgment on the matter. The court can then begin collecting the money you owe on the loan through liens against property or through wage garnishment. When you go to court, make sure to ask for proof that you owe the lender money. Often, they won’t have any, and this alone can stump the lender.

6. Lenders may continue to withdraw money from your bank account anyway

Payday loans and extra fees are automatically repaid through your checking account. If your payday lender is unable to withdraw the full amount you owe, they may try to withdraw smaller amounts. With each failed attempt, the borrower will likely have to pay an overdraft fee. The lender could also drain your account completely, causing you to default on other automatic transactions you have set up. This will lead to more overdraft fees out of your pocket or even a bounced check. There are ways to stop the automatic debits from your account, but you may need to completely close the account to stop the problem.

Here are the steps you need to take to stop an automatic withdrawal from your account:

  1. Call and/or write your payday lender.

    Call the company and inform them that you no longer authorize debits to your account. Send a revocation of authorization to initiate electronic funds transfers. Save this document in a safe place. Your bank may want to see this letter if you end up disputing an unauthorized transaction. The CFPB has a sample letter that you can use.

  2. Call and/or write your bank or credit union.

    Call your bank to inform them that you have revoked your payday lender’s authorization to debit your account. Follow up with a written revocation letter addressed to your bank rather than your payday lender. Some banks or credit unions may require you to fill out an online form. Once again, the CFPB has a sample letter that you can use.

  3. Place a stop payment on the merchant name or recurring dollar amount

    Give your bank the stop payment order at least three business days before the payment is scheduled to stop the next scheduled payment. Typically, you can communicate this in person, over the phone, in writing or through your bank’s online portal. Remember that a payday lender can alter the merchant name (the description of the transaction on your bank account) to avoid stop payment orders. Sometimes, it’s better to place a stop payment on the recurring dollar amount instead.

  4. Monitor your accounts and dispute any unauthorized transactions

    Check your account on payday. Contact your bank or credit union immediately to inform them if you spot any unauthorized activity. Your bank may require proof that you contacted the lender three business days in advance. This is where saving the letter will come in handy.

READ MORE: How to stop automatic payments on a payday loan

What should you do if you can’t repay your payday loan?

Payday loans are illegal in several states, so check your state’s laws before exploring the methods below. All is not lost if you can’t repay your loan. There are a few options you can pursue to get things settled as soon as possible: 

1. Negotiate with your lender

Lenders would rather collect the money from you than sell your debt to a third-party collections agency. Try contacting your lender to set up an extended payment plan. Explain to the lender you can’t repay the loan and that you’re considering bankruptcy. Offer to pay a smaller portion of the loan, say 50% or less. This might be all you need to do, as a lender is left with nothing when a borrower files for bankruptcy. They’re usually willing to work out a payment schedule, so they don’t walk away empty-handed. 

You are not alone in this process. Contact DebtHammer if you’re not sure about your next step.

READ MORE: What is payday loan consolidation, and how does it work?

2. Explore community assistance programs

If you need financial assistance for basic needs like rent, utilities, or food, reach out to these programs to get you back on your feet.

3. Consider credit counseling

Credit counseling will offer steps on how to resolve your payday loan issue and provide guidance on your next steps. A nonprofit credit counseling agency can work with you and your creditors to develop a Debt Management Plan (DMP).

4. Research debt consolidation loans

Qualifying for a debt consolidation loan isn’t easy if you have bad credit, but it’s worth exploring if you’re already stuck in the payday loan trap or just struggling to manage your debts.

5. Ask to borrow money from friends and family

While you may be more hesitant than ever to borrow more money, if you have a trusted friend or family member, they could help you get out of this scenario sooner than later. Then you’d only have to worry about paying them back instead of an impatient lender. 

6. File for bankruptcy

This will have long-term financial implications, so it’s not worth filing for bankruptcy over one small loan. But if you have a large and crippling amount of debt, you may want to seriously consider it. Do your research and understand the pros and cons before committing.

Can I close my bank account if I have an outstanding loan?

Yes, but you should consider this before closing any bank or credit union accounts if you want to truly deal with your debt. First, it will affect any other automatic payments you’ve set up, leaving you to potentially default on utility payments and other important monthly bills.

What if you don’t have money in your checking account when the payday lender tries to debit your account?

First, you need to know that your lender is not required to remind you about upcoming debits. They can just debit your bank account without any notification or checking first to make sure you have the funds to cover the payment.

If you don’t have enough money to cover the payment, a couple of things are going to happen:

  1. Your bank will charge you an overdraft fee. They will do this every single time your lender tries to debit your account. You better believe that they will take a “try, try again” approach when their first attempts fail.
  2. Your lender will charge you a missed payment fee. This gets tacked on to the amount you owe, which means it is subject to your loan’s interest fees.

All these fees can add up quickly, leaving you far worse off than you were before.

Luckily, you do have options to keep these fees to a minimum.

  • You can ask your bank to remove the overdraft fees.
  • You can rescind your lender’s access to your account.

Unfortunately, neither of these steps will erase your obligation to pay what you owe. And as previously stated, they can exacerbate an already difficult situation.

The bottom line

Closing your account can drain your resources, trigger collection calls, lead to bank overdraft fees and complicate your life. Instead, utilize the options listed above to get yourself back on the right track.


Do I have to pay back an illegal payday loan?

If the loan is actually illegal, you might not! Some state laws outlaw payday loans. Check with your state to figure out whether your payday loans are legal or not.

What is a tribal payday loan?

A tribal payday loan is a loan offered by a Native American tribe. These tribes claim they don’t have to follow federal or state regulations but can govern their lenders.

Does the government offer help with payday loans?

The government does not help you pay off legally obtained payday loans. However, they help keep you safe from predatory lenders and unfair lending terms! To learn whether your state offers any protections, consult your state attorney general’s office.

What other type of loan can I get with bad credit?

PALs, peer-to-peer funding, crowdfunding, cash advance apps and personal loans are better alternatives to payday loans for people with bad credit. Just make sure the lender you’re working with is legitimate.

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