If you don’t repay your payday loan, here’s what can happen: a barrage of bank overdraft fees, constant collections calls, hit after hit to your credit, a day in court and garnishment of your paycheck.
Don’t think it can’t happen because you borrowed only $300 in the first place.
“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 of the National Foundation for Credit Counseling.
This is what you can expect:
First up: Lots of bank withdrawals and calls
When the money you borrowed is due, payday lenders don’t waste time.
Immediately, they’ll initiate automatic withdrawals from your bank account, which you typically give them access to when you take out the loan. 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.
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. While federal law prohibits debt collectors from revealing their identity or your debt situation to anyone else — they can ask only for help locating you — violations of this provision are widespread, advocates say.
In a 2014 report on lender practices, the Consumer Financial Protection Bureau found that payday collectors visited borrowers’ homes and places of work and told friends, neighbors and colleagues the details of the person’s outstanding loan.
“They’re fairly aggressive because you’re already on a fairly short leash,” credit expert John Ulzheimer says. “Payday lenders understand that if someone goes delinquent, it’s much more likely they’re going to default. They’re not going to give their borrower a bunch of time, and they’re certainly not going to listen to a bunch of sob stories before they start trying to collect on the debt.”
Jail time? No — but threats are common
In a 2014 Pew Charitable Trusts survey, 30 percent of online payday borrowers reported having been threatened by a payday lender, “including the threat of arrest,” says Nick Bourke, director of the nonprofit’s small-dollar-loans project.
Failure to repay a loan is not a criminal offense. In fact, it is 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 CFPB advises anyone threatened with arrest for nonpayment to contact his or her state attorney general’s office. You should never ignore a court order to appear in court, however, even if the criminal complaint was filed mistakenly.
Try to negotiate a settlement
A lender would rather collect money directly from you than proceed to the next step, which is to sell your debt to an outside collections agency.
“It’s not inconceivable that [third-party debt collectors] are paying 3, 4, 5 cents on the dollar,” Ulzheimer says. That makes lenders’ first priority to collect the debt themselves, he says. The second option is to see if they can settle with you directly for some amount of money. The third is outsourcing to a debt collector.
“And that’s when the fun begins, because these guys are professional debt collectors,” Ulzheimer says.
Transfer of your debt to the pros can happen “very, very quickly,” he says, perhaps within 30 days. Think of the previous collections efforts multiplied: collections agents showing up at your workplace, calling you 10 times in a day, threatening to sue. A collections agency will often use the threat of a report to the credit bureaus to encourage delinquent borrowers to make a payment, since payday lenders don’t themselves use the credit agencies.
“The collector has complete latitude regarding whether they want to report it at all, whether they want to report it immediately, or in six months, or ever,” Ulzheimer says.
Next stop: The courthouse
If you think a collections agency wouldn’t bother to sue for a small amount, think again.
Michael Bovee, founder of the Consumer Recovery Network, says nearly all lawsuits against consumers today are for relatively small amounts. “I’ve seen lawsuits for under $500,” he says. “Even Capital One sues for less than $500 these days. I see those regularly.”
The lenders typically win because consumers don’t show up to court. “Consumers don’t know what to do,” he says. When the defendant is a no-show, the judge typically enters a summary 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.
Options if you default on a payday loan
Don’t let panic drive your decision-making.
“You should not prioritize paying the payday lender over putting food on the table” or paying the rent, says Lauren Saunders, associate director of the National Consumer Law Center. Cover basic needs first; you may be eligible for community assistance plans for help with rent, utilities or food. Then, seek free advice from a nonprofit credit counselor or legal aid center to set a repayment plan, she says.
Call the lender and make an offer to pay a portion of the bill in exchange for erasing the rest of the debt. “They’re usually at least open and willing to listen,” Ulzheimer says. A good figure to start the bartering is 50% of the debt amount.
“Tell the lender: ‘Look, I simply can’t pay you and I’m considering bankruptcy,’” Ulzheimer says. “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.”
Don’t ignore a lawsuit
If you can’t settle, make sure you know how to deal with debt collectors. If you’re sued for the debt, show up in court.
“You should never ignore a lawsuit,” says Saunders, a lawyer. “Show up in court and ask them for proof that you owe them the money, because often they show up without proof.” A CFPB review of one lender’s lawsuits found that 70% of them were dismissed for lack of proof.
If you can’t get the suit dismissed, do whatever you can to avoid having a judgment on your record: ask the plaintiff to accept a settlement plan, plead with the judge. A judgment is different, and worse, than simply having an unpaid loan reported to the credit agencies.
“You pay late on loans and it may show up as 30 days, 60 days, 120 days late, there’s really nothing more that’s going to happen to your credit. The damage is there,” Bovee says. A judgment, though, “has a whole new shelf life. That’s another seven years on your credit report.”
While the judgment may eventually drop off your credit report, the amount you owe never magically dissolves.
“Time never makes debt go away,” Ulzheimer says. “Bankruptcy does.”
Karen Aho is a contributing writer.