What Happens When You Can’t Repay a Payday Loan?
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A payday loan default can lead to bank overdraft fees, collections calls, damage to your credit scores, a day in court and garnishment of your paycheck.
Don’t think it can’t happen because you borrowed only $300.
“If you have a valid, binding, legal agreement to pay that debt, and you’re in a state where they can sue you and attach your wages, you’re playing a game of chicken that you’re going to lose,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
If you can’t repay a payday loan, you could settle the debt for less than you owe or file for bankruptcy if your debts are overwhelming. Here's what you can expect.
Bank withdrawals and collection calls
Payday lenders don’t waste time when the money you owe is due.
They’ll immediately withdraw the money from your bank account if you've given them access as part of the loan agreement. If the debits don’t go through, they may break the charge into smaller chunks in an attempt to extract whatever money is in your account.
Each failed attempt can trigger a bank fee against you. Successful attempts could drain your bank account and cause other transactions to bounce, also resulting in fees.
At the same time, lenders will start calling, sending letters from lawyers and contacting the relatives or friends you used as references when you took out the loan. By federal law, lenders can only ask for help in locating you — they can’t reveal where they’re calling from unless asked or explain your debt situation to anyone.
Jail time? No — but threats are common
Failure to repay a loan is not a criminal offense. In fact, it's illegal for a lender to threaten a borrower with arrest or jail. Nonetheless, some payday lenders have succeeded in using bad-check laws to file criminal complaints against borrowers, with judges erroneously rubber-stamping the complaints.
The Consumer Financial Protection Bureau advises anyone threatened with arrest for nonpayment to contact his or her state attorney general's office. You should never ignore an order to appear in court, even if the criminal complaint was filed mistakenly.
A chance to negotiate
A lender would rather collect money directly from you than sell your debt to an outside collections agency. Third-party debt collectors may pay just a few pennies on the dollar to buy your debt. If you can, start by offering 50% of what you owe to settle the debt.
“Tell the lender: ‘Look, I simply can’t pay you and I’m considering bankruptcy,’” says John Ulzheimer, a credit expert who has worked at credit scoring company FICO and credit bureau Equifax. “The minute you start using the BK word, they get real serious, because BK means they get nothing.”
Get any agreement in writing, and make sure the document states that your balance will be reduced to zero. In official terms, you want the debt “exhausted.”
If you fail to settle, make sure you know how to deal with debt collectors and what practices are illegal. For example, collections agents cannot call you incessantly or make false statements or threats about the amount you owe.
The court summons
If you think collections agencies don't bother to sue for small amounts, think again.
Nearly all lawsuits against consumers today are for relatively small amounts, says Michael Bovee, president of Consumer Recovery Network, a debt settlement company.
The lenders typically win because consumers don’t show up to court, according to a 2020 analysis from the Pew Charitable Trusts. The judge then enters a default judgment, and the court can begin to collect the money you owe on behalf of the collections agency.
“Depending on your state law, you are exposed to property liens, bank account levies and wage garnishment,” Bovee says.
You should never ignore a lawsuit, says Lauren Saunders, associate director of the National Consumer Law Center.
“Show up in court and ask them for proof that you owe them the money, because often they show up without proof,” Saunders says.
Other options if you cannot pay a payday loan
You should not prioritize paying the payday lender over putting food on the table or paying the rent, Saunders says.
Cover basic needs first:
You may be eligible for community assistance plans for help with rent, utilities or food.
Seek advice from a nonprofit credit counselor, bankruptcy attorney or legal aid center about your next moves.
Look for ways to find fast cash that don’t involve taking out more debt.
It’s not worth filing for bankruptcy over one small debt, but you may want to consider it if your unsecured debts — including payday loans, credit cards and medical bills — total half or more of your income.
Don’t delay and hope the debt will magically go away — it won’t. “Time never makes debt go away,” Ulzheimer says. “Bankruptcy does.”
