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What Happens if I Default on a Payday Loan?

If you're unable to repay your payday loan, don't close your bank account. DebtHammer may be able to help. Tap Learn More to get started.

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Tracy didn’t know where to turn. Her husband had been out of work for almost a year, and the family had been relying on payday loans to keep the lights on and the kids fed while he searched for a job. By the time he found work, they had nine payday loans totaling more than $5,000 but couldn’t afford to repay them.

When she contacted DebtHammer, she asked, “What happens if I close my bank account and default on my payday loans?’

DebtHammer works with clients daily who struggle to get out of payday loan debt. But is closing your bank account a valid solution?

“Closing the bank account gives protection,” says Jake Hill, DebtHammer founder and CEO. 

But there will be repercussions.

Our take

  • If you close your bank account, you’ll owe even more in 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 your payday loan?

Payday lenders want their money, so there will be some ramifications if you suddenly close your bank account.

Because payday lenders will automatically try to withdraw money via ACH transfers (whether or not there’s money in the account), borrowers will have to pay fees for overdrafts or bounced checks – and that’s in addition to the additional fees each payday lender will charge you, Hill says.

You could also end up missing utility payments and other critical monthly bills, which could lead to late payment fees, and it could anger your lender and boost the odds of aggressive debt collection tactics.

But Hill also says that closing your account may not be necessary. Many payday lenders are willing to work with you if you can’t afford to repay your loan in a single lump sum.

Here are five things that will happen if you close your bank account and default on your loan.

1. You’ll pay even more interest and fees

If the bank account is closed when a lender attempts to collect the loan balance, your lender will charge you a missed payment fee.

In addition, the lender may keep trying to cash your postdated check or withdraw money from the closed account. This could result in bank overdraft fees. And that’s just the beginning. There will be even more fees if your debt is sent to collections.

These fees are tacked on to the amount you owe, which means interest will accrue. And they add up quickly, leaving you far worse off than before.

Think about it. If you paid $45 in fees for an initial $300 loan and defaulted, you could have to pay as much as $70 in overdraft fees (if the lender uses the two permitted attempts), increasing your balance to $415. plus a late fee, which can often average 5% of your loan balance. This would tack on an additional $22. Suddenly, in less than a day, you now owe $437. And that’s not counting the extra fees of about $60 if you need a payday loan rollover.

In less than a day or two, you owe the lender just shy of $500 from your next paycheck.

READ MORE: Payday loan interest rates

Pro tip: This is why it’s crucial to call your bank or credit union and tell them you have revoked your payday lender’s authorization to debit your accounts. Follow up with a written request because it will protect you later if your lender continues to attempt to withdraw money from your account. 

2. Debt collectors will contact you

If you close your account, your lenders won’t waste time trying to get their money back. Debt collection efforts will begin through the payday lender or a debt 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, will likely 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 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 details on 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.

READ MORE: How to deal with debt collectors

3. Your lender or debt collector may threaten to have you arrested 

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, the CFPB and your state attorney general might be able to help.

Failure to repay a debt is a civil matter, not a criminal one. It is not punishable with jail time.

READ MORE: Is not repaying a payday loan a felony?

4. Your credit score will fall

Payday lenders don’t usually run a credit check before issuing loans. Still, your score will undoubtedly take a hit if you don’t repay them, particularly if they’re handed off to debt collection agencies. One late payment can lower your score by 100 points and stay on your credit report for up to seven years. One payday loan borrower ended up with a missed payment on his credit report once a month for over five years. These negative marks remain on your credit report for seven years.

5. You might have to appear in court

Payday loans are a legally binding contract, and if you fail to repay the loan, your lender (or a debt collector) may sue you to get their money. If you owe money to multiple lenders, that could mean multiple lawsuits. 

Sometimes, you may not even find out they’ve filed a lawsuit against you until your court summons arrives in the mail. 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. The court can then begin collecting the money you owe on the loan through liens against property or wage garnishment. 

Pro tip: If you have to go to court, ask for proof that you owe the lender money. Often, they won’t have any, leading to a ruling in your favor. If you believe your lender is not appropriately licensed by your state, bring that evidence as well. Your lenders assume that you either won’t show up or will be unprepared.

You may not need to close the account

But you may not need to close your account completely. That hassle will affect everything from direct deposits to automatic bill-pay setups. It also could lead your payday lenders to pass your debt off to debt collectors, which will, in turn, damage your credit score and lead to potentially harassing phone calls. 

In addition, each payday lender may take you to court separately to have your wages garnished. In Tracy’s case, that would mean the potential for nine court appearances. 

So, while you may be looking for an immediate solution to payday loan debt you can’t afford to repay, don’t consider closing an account until you’ve tried the following ways to stop the automatic debits from your account. 

Ask your payday lender for an extended payment plan

Though it’s best to ask this question BEFORE you miss a loan payment, some lenders offer payment plans (called EPP loans) – and some are even required to do so. However, they are not obligated to volunteer this information, so you must contact them directly and ask.

READ MORE: Payday loan extended payment plans

Apply for a Payday Alternative Loan through a credit union

These loans are designed to be more affordable, with interest rates capped at 28%. However, the maximum PAL is $2,000, so it won’t leave you altogether in the clear if you have $5,000 in payday loan debt, but $2,000 is a decent start, and your payday lenders may be willing to settle for an amount that’s less than you owe.

READ MORE: Payday Alternative Loans

Contact 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.

Contact your bank or credit union

Call your bank to inform them you have revoked your payday lender’s authorization to debit your account. Follow up with a written revocation letter addressed to your bank. Some banks or credit unions may require you to complete an online form.

Place a stop payment order with your bank

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 transaction description on your bank account) to avoid stop payment orders. Sometimes, it’s better to place a stop payment on the recurring dollar amount instead.

  • Closely monitor your account for a couple of weeks
  • Dispute any unauthorized transactions. 
  • Check your account each payday

If you spot unauthorized attempts from your payday lender to debit your account, contact your bank or credit union immediately (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

Pro tip: Consumer Financial Protection Bureau (CFPB) rules limit your payday lender to two withdrawal attempts. However, payday lenders don’t always follow the rules, and with each failed attempt, the borrower will likely have to pay additional fees. The lender could also drain your account completely, causing you to default on other automatic transactions you have set up. Or you could face accusations of trying to pass a bad check. 

If you’ve taken the above steps and your lender is still trying to withdraw money, it’s time to close your bank account. You can usually immediately open a new account with the same lender, or you can go for a fresh start and look for a lender that offers a sign-up bonus for a new account.

The bottom line

If you can’t pay your payday loan, defaulting is the worst possible option. It could lead to hundreds of dollars in fees, harassment from debt collectors, court appearances and wage garnishment. And though closing your bank account may seem like an easy way to buy you some extra time, it can drain your resources, trigger collection calls, lead to bank overdraft fees and complicate your life. Be proactive and take steps to reach a solution before your loan becomes past-due.

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