Payday loans are trouble. They are hard to pay back and the interest stacks up fast. Lenders will deposit your check or debit your bank account even if you don’t have the money, producing expensive overdraft fees. Payday loan forgiveness is unlikely: payday lenders are predators and they don’t forgive.
Don’t expect payday loan forgiveness, but you have other options for relief. Let’s look at some of them.
What Will Happen If I Can’t Pay Off My Payday Loan
Most payday loans require a post-dated check or the right to withdraw from your bank account. If you don’t pay the loan they will cash the check or attempt to withdraw the money. If the balance is too low they may keep trying to withdraw smaller amounts, racking up expensive overdraft fees.
The lender will also start calling you. If you listed references when you took out your loan they will also get calls. Threatening or abusive calls are illegal but many lenders break that law.
Most payday lenders do not report to the credit bureaus, so your late payment will not affect your credit score immediately. The lender may sell your account to a collection agency. The collection agency will report the account and your credit will be affected. The lender or a collector may sue you. If they win they could garnish your wages.
A payday loan example
The Consumer Financial Protection Bureau (CFPB) offers a good example of how quickly a payday loan can spiral out of control. When you take out your payday loan, you will likely be charged a fee of between $10 and $30 for each $100 you borrow. So, if you need $300 immediately, you’d have to pay back $345 from your next paycheck, assuming your fee is $15. If your budget is already tight, it may be hard to come up with that extra money on top of the original $300 you borrowed.
More than 90% of borrowers end up regretting their original payday loan, so think twice before turning to a payday lender.
How long does a payday loan debt last?
A payday lender or debt collector can sue you until the statute of limitations on the payday loan expires. This commonly occurs in six years, but it can be as little as 3 years or as much as 10 years. You will need to look up the statute of limitations in your state.
Even after the statute of limitations expires a collector can still ask you to pay the loan, but they cannot take legal action against you.
Will my financial institution help me with payday loan relief?
Your bank or credit union may be able to help. Many local banks and credit unions offer payday alternative loans, which are designed to help customers avoid or escape the payday loan trap. If your credit is adequate you may qualify for a personal loan, which you could use to pay your payday loan.
You will still have to pay these loans, but the interest rates will be lower and the longer loan terms will keep your payments down.
Can I ask the payday lender for an extended payment plan?
Some states require payday lenders to offer Extended Payment Plans or EPPs. Lenders who are members of the Community Financial Services Association of America are also required to offer EPPs.
An EPP allows the borrower to pay off the loan in a series of installments, or to pay it off early without a prepayment penalty. It provides the opportunity to pay the loan off in several installments without adding on further fees or interest.
Many lenders will not tell you that they offer an EPP. You will have to ask, and you will have to apply no later than one business day before the loan is due. If you know you won’t be able to pay, take the initiative and ask.
A rollover is not the same as an EPP
A lender may ask you to renew or “roll over” your loan. This is not the same thing as an EPP. Rolling over a payday loan means that you are paying a fee, often a large one, to delay paying back your loan. The fee is charged on top of the loan amount.
Borrowers who renew their loans often find themselves sunk in a payday loan trap, paying more fees and interest without reducing the principal of the loan.
Can I cancel my payday loan?
Most states require a cancellation period for payday loans. You will usually have to cancel by midnight of the business day following the day on which you took out the loan. For example, if you take out a loan on Saturday and the lender is closed on Sunday your cancellation period would expire at midnight on Monday.
You will have to return the loan proceeds but you will not be charged interest or fees. You will have to submit a written notice of cancellation. Your loan agreement will explain the cancellation process. The cancellation period may vary from state to state. Check your state’s laws to be sure.
Will I have to pay to cancel my payday loan?
If you cancel within the specified period you will not be charged a fee for cancellation.
State laws offer some payday loan relief
Your state government won’t pay your payday loan, but some states have policies that can limit the damage. Payday loans are banned altogether in 16 states and Washington D.C. Others may place limits on the annual percentage rates and fees that lenders can charge. Check the payday loan laws in your state to see if your loan is legal.
You may not be required to pay back a loan that does not comply with state laws. In Washington, for example, lenders not licensed in the state or those charging higher interest than state law allows cannot enforce loan agreements. Contact your state’s regulatory body if you believe your lender is violating state law.
What if my loan is through a tribal lender?
Some online payday lenders partner with Native American tribes. These enterprises are usually bankrolled by non-tribal payday lenders but are registered on Native American reservations as companies operated by the tribe. This provides them with sovereign immunity from suit and enables them to violate state laws.
Tribal loans are worse than payday loans. Interest rates are extremely high and loan terms are longer, allowing the interest to accumulate. Many borrowers find that they are only paying interest and not reducing the principal. Reports of unauthorized withdrawals are common. The sovereign immunity of these lenders makes them almost impossible to sue.
Financial regulators are contesting the application of sovereign immunity outside tribal areas and trying to crack down on tribal loan abuses. The issue may have to be resolved by the Supreme Court. Until it is resolved, avoid tribal loans at all costs.
Are you stuck with a bad payday loan? Here are a few things you can do:
Should I take out a new payday loan to repay my overdue one?
Many payday loan borrowers either roll over their loans or use new loans to pay old ones: payday loan data indicates that 25% of payday loans are reborrowed and 80% are taken out within two weeks of paying off another loan. Payday loan interest rates often exceed 600%, making it very difficult to repay your loan as scheduled. Payday loan lenders bank on this.
This is known as the payday loan debt trap. You borrow, you can’t afford to pay your short-term loan from your next paycheck, so you either roll over your loan or take out a new one. Soon you are stuck in a never-ending cycle of escalating fees and interest payments that suck up an ever-increasing percentage of your already limited income: the average income of payday loan borrowers is $30,000, well below the US average.
Using a new payday loan to pay off an old one is a temporary escape, but it’s not a solution. It will just get you deeper into the payday loan trap. Your goal should be to escape the trap, not fall deeper into it.
Can I close my checking account so the payday lender can’t debit my account?
When you take out a payday loan the lender will ask for either a post-dated check or an Automated Clearinghouse (ACH) authorization that allows them to debit your bank account directly.
You can prevent the lender from withdrawing the money by closing the checking account. You can also issue a stop payment order for the check or cancel the ACH authorization, though you may be charged a fee.
If you prevent the lender from withdrawing the money, they will pursue you aggressively. They will push you as hard as the law allows and some may go beyond legal limits. They may sue you. If they win a judgment against you they can garnish your wages.
Can a payday lender take me to court if I don’t pay?
If you fail to pay a loan you are breaking a contract, and the lender can file a civil suit against you. A debt collector can also sue you. If they get a judgment against you they can garnish your wages.
You cannot be arrested or jailed for not paying a payday loan. Lenders and collectors are not allowed to threaten to have you arrested or jailed. You can be jailed for contempt of court if you fail to appear at a hearing or comply with a judgment. If you are sued, take it seriously and follow all instructions from the court.
Payday lenders can sue you, but they don’t want to. Going to court takes time and money. If you won’t be able to pay, contact your lender at once. Try to set up an EPP or other payment plan. Most lenders would rather work with you than take you to court.
Will it hurt my credit score if I default on a payday loan?
Most payday lenders do not report to the credit bureaus. Creditors have to pay to report, and if they report they are subject to additional regulation under the Fair Credit Reporting Act. Payday lenders don’t want to deal with that.
Late payments will not affect your credit score if the lender does not report to the credit bureaus.
If your lender sells your account to a debt collector, the collector will almost certainly report to the three major credit bureaus — Experian, Equifax and TransUnion. Collection accounts can hammer your credit. This will hurt you when you need to apply for another type of loan.
Why are payday loans bad?
A payday loan may seem like an easy solution to a financial problem. There’s no credit check, you can get the money quickly, and you’ll pay it back with your next paycheck. All you need is a bank account and a source of income.
That reasoning gets a lot of people into trouble. Payday loans often carry annual percentage rates of 400% or more. Even if you manage to pay your loan off, you’re likely to find yourself short of money — and looking for another loan — before your next paycheck. Payday loans are notorious for sucking users into a cycle of repeated loans, often stacking up bank and lender fees in the process.
The average payday loan borrower takes out a $375 loan and ends up paying $520 in interest and fees.
Most payday loan borrowers have relatively low incomes, and 58% of them have trouble meeting their monthly expenses. Falling behind and adding interest and fees to your list of expenses is a sure way to get over your head in debt trouble.
How to get payday loan help
If you’re stuck in the payday loan trap you need to pay those loans off and break the payday loan cycle. You also need to get your finances under control so you’re not running out of money before every paycheck.
Here are some of your options.
Payday loan consolidation
Debt consolidation combines multiple loan payments into one. This can help you organize and manage multiple payments. There are several ways to consolidate payday loan debt, and consolidation can be combined with other services.
Debt settlement/consolidation companies
Debt settlement involves negotiating with your creditors to get them to accept less money than you currently owe. You can do this yourself, but you can also hire a debt settlement to do it for you. Some companies will combine settlement with consolidation, negotiation with your creditors and combining multiple debts into one payment.
Check the reputation of any company you’re considering. Not all of them are legitimate and some are outright scams.
Non-profit credit counseling services can help you in several ways.
- Organize your finances. Credit counselors can help you set up a budget and manage your money more effectively.
- Negotiate with creditors. Credit counselors will contact your lenders and try to get you a better deal.
- Debt Management Plans. Many credit counselors offer debt management plans. You’ll make one monthly payment to the counseling service and they will distribute the money to your creditors.
Most legitimate credit counseling services will offer an initial counseling session for free. You will pay a fee for a debt management plan.
Debt consolidation loans
A debt consolidation loan allows you to take out one loan, use it to pay off several other loans, and then pay off the debt consolidation loan. This allows you to replace multiple monthly bills with one simple, regular payment. You may also get a substantially lower interest rate on your debt consolidation loan, and a longer loan term can keep your monthly payments down.
The downside of debt consolidation loans is that you may need good or at least fair credit to qualify. That may make them inaccessible to many payday loan borrowers.
More options for debt relief
There are several other ways to avoid or escape the payday loan trap.
Filing for bankruptcy can remove most of your unsecured debts, including payday loan debt, medical debt, and credit card debt. You cannot discharge alimony, child support, most tax debt, and most student loan debt in bankruptcy.
Keep in mind that there are costs involved with filing for bankruptcy and it will have long-term financial implications, so don’t make any decisions about whether to file without consulting a bankruptcy attorney.
Bankruptcy is a complex process and you may need legal assistance to complete the process. If you have a relatively simple bankruptcy case you may be able to file without legal costs using Upsolve, an app designed to assist low to middle-income people with filing for bankruptcy.
Lenders like Upgrade and LendingPoint will make personal loans to individuals with bad credit, and Upstart will lend to people with no credit score. These loans can be used to consolidate payday loan debt or as an alternative to a payday loan.
You won’t get the best interest rates but they will be far lower than the rates you will pay on a payday loan and you’ll have more time to pay the loan back.
Credit card cash advance
Most experts advise against using credit card cash advances: cash advances carry higher interest rates than purchases, and interest begins accruing immediately. While these normally should be avoided, the interest rate is still much smaller than you’d pay with a payday loan. You don’t want to use cash advances all the time, but in an emergency, it’s a better option than a payday loan.
Cash advance apps
Cash advance apps like Earnin’, Dave, and Brigit allow you to draw small advances against your next paycheck. Some of them don’t charge a fee for the advance, though you may pay a fee for using the app. Only established app users can draw advances, so this is a way to avoid future payday loans, not a way to pay off loans you already have. If you’re in a financial situation where a short-term loan could eventually be a necessity, it’s best to sign up for one of these apps now so that your account is ready to go in an emergency. No one likes to plan for the worst-case scenario, but if you’re prepared for the worst it could save you hundreds of dollars.
Borrow from friends or family
Nobody wants to ask for a loan from friends or family. It’s awkward, it’s embarrassing, and it puts relationships at risk. It’s still better than falling into the payday loan trap.
If you borrow from a friend or family member, take it seriously. Make a written agreement, set a payment schedule, and keep to it. Handle it right and you can strengthen a relationship instead of breaking it.
Peer-to-peer lending platforms link borrowers with individuals who lend money. Many platforms and lenders require good credit, but there are some, notably P2P Credit, that will handle loans for people with low credit scores.
The bottom line
Payday lenders are not your friends. Don’t expect payday loan forgiveness. Lenders are subject to laws and regulations and they have an incentive to work with you to set up a repayment plan. You may be able to get help with getting better terms or with finding alternative loans to consolidate your debt or avoid payday loans altogether.
It’s easy to be tempted by what seems like easy money. Remember that payday loans are a trap. You can avoid that trap, and if you’re already in it you can escape!
Payday loan relief programs that work
Most people who are trapped by payday loans can’t qualify for many of the options above, and that’s a big problem.
Payday loan debt causes a huge amount of stress for borrowers — and that’s why we started DebtHammer.
DebtHammer is what some call a payday loan consolidation program. We don’t provide loans, but we analyze loans and consolidate some of them into one, and offer a flat monthly payment. If you have one or more payday loans, contact us for a consultation and we’ll see if we can help get you out of payday loan debt for good.
Payday lenders can sue you to collect your debt. If they win a judgment against you they can garnish your wages. Try to negotiate a payment plan with your lender. If you are sued, respond to all messages from the court and appear in court if requested.
A debt collector cannot sue you over a debt once the statute of limitations on the debt has expired. The statute of limitations on debts varies from state to state. It may be as little as three years or as much as ten years. Check your state’s rules to be sure.
Zombie debts are old debts that have been resurrected, often by collection agencies. These are typically old debts. The statute of limitations may have expired on the debt. You may have paid the debt already. It may even belong to someone else.
Any time a debt collector contacts you about a debt they must provide you with the details of the debt. You can dispute the debt. If you know your rights and assert them you can fight back against attempts to collect zombie debt.
You cannot remove the data in your credit report and start over unless the entries are errors. Most negative items will be dropped from your credit report after seven years. You can build your score by disputing any errors and adding positive records to your credit history.