How Does Defaulting Happen?
When payday loans typically do not require a credit check, they often require a pre-dated check or electronic access to your checking account.
When the due date for a payday loan arrives, you can either make a cash payment in person, or the lender will withdraw the outstanding balance from your bank account. If the money is not in your bank account and the bank does not cover the overdraft, the lender will continue attempting to deduct the amount. Each time the payment is returned due to insufficient funds, an insufficient funds fee will be charged by the bank, which increases your debt with the bank while the lender is trying to collect the amount owed on the payday loan.
When the lender is unable to deduct the balance from your bank account, they will begin contacting you to collect the outstanding amount. They may send you emails, call you at work, or contact your friends and relatives to find you and force you to pay. Meanwhile, your outstanding payday loan balance may increase due to added fees, interest, and penalties.
If the lender is unable to collect the amount, they will eventually transfer your payday loan to a third-party debt collection agency. After that, you will have to deal with a debt collection agency that may have more aggressive collection efforts than the original lender.
The Impact of Default on Your Credit
Your credit report was safe from the payday loan since no credit check was performed. However, once the debt is transferred to a debt collection agency, it will be added to your credit report. Because of this, defaulting on a payday loan can affect your credit score.
Note: Any negative balance on your checking account may also be transferred to a separate debt collection agency, leading to two separate collection accounts stemming from one default on a payday loan.
Additionally, excessive overdrafts can limit your ability to open checking or savings accounts in the future. Most people are familiar with credit reporting agencies, but banks and credit unions use different reporting agencies to screen potential account holders.
Aggressive Collection Tactics for Defaulted Payday Loans
The lender or debt collection agency may sue you for the outstanding balance. A lawsuit may result in a judgment against you if the court finds that you are legally obligated to pay. With a court judgment, the payday loan lender can obtain a court order to garnish your wages or seize your bank account.
Note: The best step when facing a potential lawsuit from a debt collector is to seek legal advice.
Debt collection agencies must stop contacting you if you request them to do so, but this does not erase the debt. It may be transferred to another debt collection agency that can contact you until you request them to stop, and ultimately, the debt will be reported to credit reporting agencies and you are still liable to be sued for the debt.
Avoiding Payday Loans
Payday loans are one of the most expensive types of loans you can borrow. They are also one of the hardest types of loans to repay. The average payday loan borrower is indebted for five months of the year and ends up paying over $500 in fees.
The cost of payday loans is much higher than other forms of borrowing, but this is not made clear because lenders do not disclose annual percentage rates. Instead, a flat fee is charged, like $15 for every $100 borrowed. For a payday loan due in two weeks, this comes to an annual interest rate of 400%. Meanwhile, the average annual interest rate on a credit card is around 20% to 25%.
If
If you are considering getting a payday loan, don’t. Exhaust all other options available to you, including selling things or borrowing from a friend or family member, before taking out a payday loan to avoid the potential consequences of defaulting on a payday loan.
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Sources:
Pew Research Center. “Payday Loan Facts and the CFPB’s Impact.”
Center for Responsible Lending. “Payday Mayday: Visible and Invisible Payday Lending Defaults.”
Experian. “What Is a Payday Loan and How Does It Work?”
Consumer Financial Protection Bureau. “List of Consumer Reporting Companies.”
Consumer Financial Protection Bureau. “What Should I Do If a Creditor or Debt Collector Sues Me?”
Consumer Financial Protection Bureau. “What Is a Debt Collector and Why Are They Contacting Me?”
Consumer Financial Protection Bureau. “What Is a Payday Loan?”
Source: https://www.thebalancemoney.com/what-happens-if-you-default-on-a-payday-loan-4165980
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