Loan Default Consequences For Payday Loans

A woman is sitting on a bench thinking
The Consequences Of Missing Loan Repayments
Part 1 Loan Default Consequences For Payday Loans
Part 2 Is It A Crime To Miss A Loan Payment?
Part 3 Debt Counselling Is A Worthwhile Consideration

Life in the states, as in most other western countries, is getting more expensive all the time. As a consequence, many people find it hard to meet everyday expenses and even if you have a regular income, managing your money can sometimes be difficult.

If you have no savings and an unexpected event occurs like a medical emergency or a broken down automobile, you might have considered taking out a payday loan to cover the shortfall. In this article, we take a look at:

  • The way payday loans work
  • Interest rates and fees of payday loans
  • Consequences of loan non-repayment
  • Civil court action and court judgment

Fast access to cash and a lack of strict requirements has made the payday loan very popular. But, do you know what would happen if you are unable to pay back the loan on time?

How do payday loans work?

Payday loans are very simple. You borrow a sum of cash and the lender charges you a fee. The charges will usually consist of a sum of interest and you could also be charged a finance and validation fee. That is, a fee for setting up the loan and having it registered on a state database. When the repayment becomes due, you pay back the lender the amount you have borrowed plus the full charges.

Defaulting on a payday loan repayment  can lower your credit score significantly

Many people use this type of loan to cover an unexpected expense and sometimes are unable to pay back the loan on time. As with all monetary matters, there are consequences if a loan remains unpaid and this article will spell out those consequences in detail.

In a perfect world, no one would need to borrow at the high rates of interest charged for payday loans. But, these are the times in which we live. Therefore, understanding how non payment can affect your future is an essential element when you take out a payday loan.

High rates of interest and charges

Unlike normal loans, payday loans are for small sums of money borrowed over a short period of time. In order to make the agreement profitable, lenders charge high rates of interest and this covers the cost of the administration fees and gives them a profit on the loan. If the repayment is not made on time there are usually high extra amounts to pay in the form of fees.

A man is shown researching on his laptop for payday loans

There can also be extra fees if the lender has tried to cash a post dated check. The bank will charge a non sufficient funds fee as will the lender and if the check has been presented more than once, each presentment will cost you money.

Non payment of a payday loan is always going to cause problems in the future. Therefore, it is always better to try and come to an arrangement with the lender to pay off the loan either using an installment plan or getting the money from another source like family or friends.

Learn about the consequences of loan non-repayment

If you default on the repayment of a payday loan and have been unable or unwilling to make an arrangement with the lender, your credit rating can be hit. A default will stay on your credit report for seven years and it can mean you will not be accepted if you want a loan in the future.

Typically, if a lender cannot get back the sum you have borrowed, they will pass the debt to a debt collection agency.

Typically, if a lender cannot get back the sum you have borrowed, they will pass the debt to a debt collection agency. Some of these agencies adopt very aggressive tactics to try and force repayment. They have been known to call people at their place of work, contact friends and family and generally trash a reputation.

Lenders often operate a black list between their businesses so even if your credit rating has not been affected, you may be unable to get another loan in the future. Both of these consequences can cause problems in the future especially if you want to take out a mortgage to buy your own home or even to get a simple credit card.

Civil court action

Although the legislation for payday loans in most states does not allow the lender to take out a court action for repayment, you can be sued through a civil suit. This might be pursued by the lender but more often it will be the collection agency that has bought the debt.

A picture of scales symbolizing the justice system

Lenders often choose to sell the debt and cut their losses rather than spend a significant amount of time trying to claim back the outstanding cash.

What does a court judgment mean?

If a court judgment is passed, the agency may enforce repayment by seizing goods to the value of the debt. So, even though the original loan was unsecured, a court order allows the lender or collection agency to take any goods or property that you own in order to satisfy the outstanding claim.

In many states a civil order can remain in place for up to ten years which means the claimant can have access to your belonging for that period of time. Even if you have moved away and purchased a house, the creditor may still be able to stake a claim on the new property that you have acquired long after the original court case.

A lawsuit may also allow the claimant to have access to your salary to pay off the debt. So, if a garnishing order is granted, the claimant can take a monthly amount from your wages before the paycheck reaches your bank.

The Consequences Of Missing Loan Repayments
Part 1 Loan Default Consequences For Payday Loans
Part 2 Is It A Crime To Miss A Loan Payment?
Part 3 Debt Counselling Is A Worthwhile Consideration

About the author

David Warren

David Warren is an expert on personal loans across the United States. His career in banking has helped make David the loans specialist that he is today. He shares his analysis and insight into the personal finance industry on onlinecreditusa.com