It’s a scary feeling if you’ve taken out a payday loan and can’t pay it back. That short-term cash infusion you needed has suddenly spiraled out of control because of high fees and interest rates. The payments are being debited from your account automatically and the money just isn’t there, and now you’re also getting hit with overdraft fees. What’s next?
What will happen if you close your bank account and end up defaulting on your payday loan? Let’s explore the consequences and alternatives.
What is a payday loan?
A payday loan is a short-term loan with an extremely high interest rate, typically for $500 or less. In theory, the purpose of the loan is to help someone in a time of need pay their bills while they wait for their next paycheck, usually about two weeks. The qualification requirements are usually simple and no credit check is required, making it easy for people with bad credit — who won’t qualify for a credit card — to get some quick cash. The problem is that once the fees and interest kick in, most borrowers can’t repay the loan by the due date.
You might know the payday lending industry by other names. Payday loans are often also referred to as cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans.
In practice, however, they’re predatory loans designed to take advantage of people when they are at their most vulnerable, and they’ll probably land you in a debt trap.
What happens if you don’t pay back your payday loan?
Most borrowers intend to pay their loan back as arranged, within about two weeks, at least until the complications arise. They find they need that money to pay another crucial bill and have to arrange another loan, with more fees. Eventually, borrowers get trapped in a cycle of debt where they’re repeatedly taking out new payday loans to pay off the old ones.
If you don’t pay back your loan, you’re in what’s known as payday loan default, and it will lead to a whole host of troubles, including fees, finance charges, collection calls, and your credit score will take a hit.
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. If you don’t have the money to pay back, lenders will allow you to continue the loan and will add even more fees to be added to the original amount. 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.
Lenders will withdraw money from your bank account
Payday loans and any extra fees are usually 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:
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 may even contact relatives or friends you used as references when you took out the loan.
Keep in mind that the Federal Trade Commission and Consumer Financial Protection Bureau 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, nor 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 a number of states. Make sure you know your state’s laws.
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.
Your credit score will take a hit
Payday lenders don’t usually check your credit score before issuing loans, but if you don’t repay them your score will certainly take a hit. 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 for sure you can pay back the loan amount right away.
You might get 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.
What should you do if you can’t repay your payday loan?
Payday loans are illegal in several states, so be sure to check your state’s laws prior to 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:
Negotiate with the 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 a payment plan. Explain to the lender you can’t repay the loan and 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 put 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.
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.
Consider credit counseling
Credit counseling will offer steps on how to resolve your payday loan issue and provide guidance on your next steps.
Research debt consolidation plans
By putting together a monthly plan, we’ll help you pay off your debt and get lenders off your back.
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 as opposed to an impatient lender.
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.
Can I close my bank account if I have an outstanding loan?
Yes, but you should seriously think this through 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.
Contact your bank or credit union to see if they offer any alternatives.
Also, many payday lenders require you to provide banking information so they can automatically debit payments from your account, but if the money isn’t there, it triggers fees and extends your debt cycle. Talk to your lender about options and take action to stop automatic debits from your account. That may be enough to solve the problem.
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.