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Many people use payday loans to cover a cash shortage, but because of the high cost of borrowing and the loan’s short turnaround time, it’s difficult to pay back a payday loan on time.
When you default on a payday loan, it can have severe consequences such as additional fees, collection calls and damage to your credit score, or potentially even a day in court and garnishment of your paycheck.
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.
You’ll likely be charged fees
Once your loan is due, a payday lender will withdraw the money from your bank account, if you've given them access as part of the loan agreement. If the debit doesn't go through — say if you don’t have sufficient funds — the lender 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.
Some payday lenders may also charge late fees for missed payments.
You may be offered a rollover or renewal
Depending on what state you live in, some payday lenders may give you the option to roll over or renew the loan. This means you can delay repayment of the loan for an additional fee.
For example, if you borrow $100 for a $15 fee and can’t pay it back after two weeks, you might be able to extend the loan for another two weeks by paying an additional $15. You’d still owe the original $100, plus $30 in fees.
Though a rollover may provide short-term relief, it can greatly increase what you owe, making it harder to get out of debt.
There may be collection calls
If your loan remains in default, lenders may start calling you, sending letters from lawyers, and contacting the relatives or friends you used as references when you took out the loan. By federal law, debt collectors can only ask for help in locating you — they can’t explain your debt situation to anyone.
What to do if a lender threatens jail time
If a payday lender contacts you directly, know that it’s illegal for them to threaten you with arrest or jail time. Though failure to repay a loan is not a criminal offense, 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 their state attorney general's office. You should never ignore an order to appear in court, even if the criminal complaint was filed mistakenly.
You may be taken to court
On that note, you can be sued for not paying back a payday loan, even if the loan amount is small.
Nearly all lawsuits against consumers today are for relatively small amounts, says Michael Bovee, president of Consumer Recovery Network, a debt coaching company.
Lenders typically win the lawsuits 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.
How to negotiate with a payday lender
The good news is 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.
Other options if you can't 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:
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 annual 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.”