Payday loans are a great help when it comes to meeting cash crunch situations. However, due to their high rate of interest and short repayment period, many people are unable to repay their payday loan. Depending on the state, the cost of a payday loan can be as high as annual percentage rate (APR) of up to 400 percent. In comparison, credit cards have APRs of around 13 to 30 percent. It explains why payday loan defaults are so common.
Defaulting on payday loans can impact your credit score. Additional fees and charges will start accumulating and you may get collection calls from the lender. In extreme cases, you may also have to visit a courtroom. To better understand the eventualities, let’s take a look at what happens if you default on your payday loan.
Late fee and additional charges – Additional charges applicable on payday loan default will depend on the terms and conditions mentioned in the loan agreement. If there is balance available in your bank account, the loan amount will be deducted. It will be done even if your bank account balance reaches below the minimum account balance. In such cases, your bank may charge a fee.
In case your bank account does not have sufficient funds, the bank may convert the loan amount due into smaller chunks. This way, they can claim whatever balance you have in your bank account. Every time a payment request bounces, an additional fee may be applicable. Some payday lenders also have the provision to charge late fees when you default on your payday loan. As is evident, defaulting on a payday loan can wreck your bank account.
Collection calls – If you default on your payday loan, your lender may start calling you. They can also call your friends and relatives, whom you may have mentioned as references while taking the loan. Although lenders do not have the right to explain your situation to your references, they can call to help locate you. Please note that defaulting on a payday loan is not a criminal offence. So, you should not be intimidated by threat calls of arrest or jail time. If you receive such threats, you need to contact your state attorney general’s office.
Court summons – Even though you cannot be arrested or jailed for defaulting on your payday loan, you can still be asked to be present in the court. This happens when you are sued for not repaying a payday loan. The court can issue a summon even if you owe a small amount. Lenders usually approach the court, as they know that most people will not show up. In such cases, they get the judgment in their favor.
Depending on the state, default on payday loans can lead to bank account levies, property liens and wage garnishment. That is why it is important to be present in the court. Explain the situation and you may get more time to repay your debt.
There are various ways to deal with a payday loan default situation. One of the best options is to negotiate for a rollover or renewal of your payday loan. If the lender agrees, the amount you owe will be converted into a new loan. The overall cost of the loan will double, but at least you will have more time to repay. You will also be able to avoid all the hassles explained above.