What Are My Options if I Default on My Payday Loan?
When you feel you may default on my payday loan, consider the long-term repercussions the action can have on your credit. Certain situations may keep you from paying off a debt. A solid assessment can help you prepare for next steps.
Default on my payday loan considerations
A default on a payday loan is a serious situation. However, it is no more serious than defaulting on any other type of loan or credit account. The same basic collection procedures follow. The main difference you may experience is a more aggressive collection process.
To default on my payday loan is to invite consistent collection calls until the debt is settled. For the lender, this may mean you paying off the loan or a third party agency buying the bad debt. For you, collection efforts are likely to continue no matter who owns the loan.
Payday loan basics
The term “payday loan” has become an umbrella term that encompasses any type of short term loan. Including cash loans online and small cash loans. These loans typically do not require collateral. Plus repayment is built around the paycheck of the borrower.
The overriding theory is that you need money before payday. The loan is provided and you move forward with repayment when you receive your next paycheck.
Many payday lenders offer an option to extend a loan beyond the traditional repayment term. Additional fees would however apply. Moreover interest accrued on prior loans are folded into a new principal total subject to more fees and interest.
There are both pros and cons to payday loans. Many cons relate to the relatively high cost of borrowing. Pros are the ease of access for those with a limited credit history or low credit scores. Payday loans also often provide funds fast. What makes them ideal for securing emergency financing.
Repaying a payday loan
When you receive fast payday loans, the best payday lenders provide funds immediately in the form of a check or a direct deposit into your bank account. To receive the funds, you provide the lender with the basis of your repayment at the time of acceptance.
For example, you would provide the lender with one of your checks made out for the full amount of the loan plus interest and any applicable fees. The check is postdated to the date of your next paycheck.
The payday lender holds the check to provide you with an opportunity to either make full payment or extend the terms. If you do not visit the office or contact the lender, the postdated check becomes current. In a best case scenario, the loan balance is paid off. In the worst case scenario, you default on the loan.
Check bouncing when default on my payday loan
If the lender attempts to cash your post dated check on a predetermined “payday” for you, and the check bounces, your account is late. Depending on the terms of your loan, one or more late payments may be allowed before actual collection attempts start by the short term loan lenders. When default on my payday loan, the costs extend far beyond the added fees the lender may charge.
In the interim time period, you may be facing other financial difficulties. A bounced check often carries with it a fee charged by your bank. If the bank chooses to cover the check, there are overdraft fees.
When you provide a lender with a postdated check, it is imperative that you leave enough money in your bank account on payday to meet the minimum payment. If you cannot, visit the loan office to renew your loan.
When default on my payday loan: how to avoid
Avoiding default is the best option for you when you obtain a payday loan. As long as you can make a minimum payment on the note and afford the refinancing fees, attempt to renew the loan. Visit the loan office each renewal period and process the paperwork as long as you have access to funds.
Pay the outstanding interest and the cost of renewing the loan if at all possible. Should you be unable to at least stay ahead of these charges, it is unlikely you can pay off the full loan amount in the near future. When default on my payday loan seems like the only option available to you, prepare for dealing with collections.
After you are back on your feet, it is possible to make a deal with the firm’s collection office or a third-party agency. With careful planning, it only takes a few years to balance out the affect of the temporary default on your credit score.
Overdraft fees when default on my payday loan
When you sign up for a payday loan using electronic funds transfer options, the loan provider is likely to direct withdraw funds from your bank. If you provided your bank account routing number and account number, any agreement typically provides the institution with access.
On the day the loan is due, or payday, the setup moves forward just like it would with a paper check. You can visit the lender and renew or pay in person or have the funds automatically taken from your account. When default on my payday loan, there are inadequate funds in the bank account for the full repayment to process.
Your bank can either reject the charge outright or fund the charge and add overdraft fees to your account. This means you must then repay your bank the money given to the payday lender plus additional fees – some as much as $35 or more.
If the payday lender suspects you have a lesser sum in the bank, the business may attempt a smaller pull to regain part of the funds loaned. It may also attempt several smaller pulls.
If any or all of these attempts to pull funds bounce, each attempt could still carry a charge. These added fees can quickly place you in a more difficult financial situation than the one that led to your pursuing the loan in the beginning.
Collection actions when default on my payday loan
You may believe a small payday loan carries with it little consequence. However, payday loans are a serious business with a history of collecting on debts owed.
According to The Pew Charitable Trusts research on fast payday loans, the debts owed to payday lenders are collected at a rate the equivalent of successful collections by other entities. This means you are equally likely to be harassed for late payments on a $300 payday loan as a $30,000 car loan.
To avoid ending up in a negative situation, treat the loan like a business matter from the onset. Put aside money at every opportunity to get ahead of the loan balance and direct any additional funds to the loan.
If collection efforts start, explain your financial situation to the lender or collection agent and ask about your options. When there is a repayment option you can meet for a payday loan, agree to the terms. If there is no option, ask for temporary relief from payments until you get back on your feet.
Your account goes into default?
By the time your account goes into default and collection calls start, your chances of obtaining a deal increase. The lender already views your account as a potential negative on the balance sheet, so regaining any funds expended is desired.
When your account first moves past a payment period, your payday lender will likely keep any collection efforts in house. The primary goal at this point is to keep your loan on the books and possibly renew the loan while you get your financial act together. By working with the lender, you may be able to keep missing a payment from becoming a full-fledged default.
When default on my payday loan starts to look like a real possibility due to multiple missed payments, brace yourself. An established payday lender then either moves the debt to an in house department focused solely on collections or sell the debt to a third party collection agency.
Professional collection agencies are skilled in pursuing customers who owe a debt. With access to advanced people searching capabilities, these businesses can find your new phone number or address time after time. If it is possible, find a way to deal with these individuals.
The good news is, a professional collection agency likely paid a discounted price for your payday loan – perhaps even cents on the dollar. This means it is much easier for the collection agency to make money while cutting you a deal.
Contact the collection agency and explain your financial situation.
Tell the agency what you can pay outright – half, one-quarter or less of the debt. The agency may accept your offer or make a counteroffer. Agencies may also offer you access to a low monthly payment plan in an attempt to recoup the full amount of the original debt. Accept the deal you feel you can most easily pay.
Default on my payday loan may be your only option in some instances. When your finances show no signs of improving, negotiating with a collection agency may also be impossible.
Judgments when default on my payday loan
The next step when you default on my payday loan is a journey to the local courthouse. Payday lenders or their collection agencies often file legal papers to regain funds. These cases may be filed in small claims or in district court depending on the size of your payday loan.
When you are served with a lawsuit, consider responding in a prompt manner. Lenders know that many people do not bother to show up for court or file a response. This guarantees a court order in favor of the lender.
By appearing in court, you at least stand a chance of avoiding a judgment. If you skip out on court, defaulting on your loan definitely leads to a judgment. This judgment is often classified as a default judgment.
A judgment provides your payday lender with the legal means to pursue collection efforts against you in a more formal, aggressive manner. If you have a bank account or savings account, prepare for It to be reviewed. When you have a payroll job, brace yourself for the garnishment of your wages until the terms of the loan are met.
While a judgment is a negative mark on your credit report and paycheck garnishment reduces your income, in the end it provides you with a cleared debt. Other actions a payday lender may choose to pursue can carry more impacting consequences.
Long-term collection actions when default on my payday loan
If the lender has a lien on any real or personal property you own, be prepared for seizure and the selling of your assets. For example, if you offered your car as collateral, the lender may seize the vehicle and sell it to cover the cost of the loan. Should your car be worth more than the loan and a sale of a higher value realized, the lender is obligated to provide you with the remaining funds. However, the lender is not required to shop around to find the best price for your car. This means you could end up losing even more money if your assets are taken.
Depending on the size of your payday loan, a lender may also pursue additional collection actions with the power of the judgment behind them. At tax refund time, the lender may opt to have your bank withhold your funds to pay the loan off. Any other lump sum payments may also be seized by the lender based on the court order. Avoiding a payroll job is not a guarantee of avoiding your need to repay an outstanding loan.
Ways to avoid collection actions
As long as you make a good faith effort to pursue repayment of the payday loan, most lenders want to work with you. The goal is to keep you as a customer, maximize the return on the original loan through renewals and make as much money as possible.
Selling the value of your loan to a third-party collection agency reduces the earnings for the lender. Many payday loan places, particularly local options, can work to avoid this situation. If you are facing a temporary hardship, such as unemployment, divorce or a delayed payment like a tax refund, let the lender know and provide an estimate of when full repayment should take place. In the interim, make as many smaller payments as possible to keep the loan current.
When you miss a payment or two and can’t see a path forward, consider reaching out to friends or family for help. Your parents or grandparents may be able to lend you the money needed to avoid a full default on the loan. Explain your financial situation in detail to your relatives and establish a repayment schedule with them as you work to regain control of your finances.
When default on my payday loan, who do I pay?
Should your payday loan account go to collections, you can encounter a gray area related to repayment. If the loan is actually sold to a third party, the original lender no longer owns the account. This means you need to repay the collection agency unless your lender can buy the debt back from the agency.
Before accepting repayment terms from any collections agency request the terms in writing. Even more after your account goes into default mode. You need to establish who you are paying and how much. You also need to know the payment of the debt will be reflected on your credit report. Then relinquishes you from all obligations related to the debt.
A professional debt collection agency should be able to send you a full repayment schedule with an agreement. The schedule needs to feature the due dates for any installment payments. It also has to reiterate how the collection bureau plans to close out the account when the last payment is made.
Recovering from collections when default on my payday loan
When you default on a payday loan and cannot repay it, the original payday loan should appear on your credit report as a closed account. It will show a minimum of a 30 day, 60 day and 90 day delinquency. Plus it must reflect that the account was closed and charged off.
If the account moved to a debt collector, it may appear again as a fresh account. It would then show up in the collections and judgments section of your credit report. A collection or judgment account appears on your credit report for a minimum of seven years after the date of the last action on the account.
This makes it important to only pursue a repayment plan when you have the intention and ability to follow through. Starting a plan and defaulting on the terms again only exposes you to new negative reports. It keeps the derogatory items on your report that much longer.
If you have repaid your loan and still have a negative mark on your credit report, you can dispute the item in an attempt to have the lender update the account. When you paid off a collections account associated with an original loan, you can make a notation on the original loan that the amount was later settled. While this does not improve your credit score, it provides additional context to any future lenders who are reviewing your credit and digging deeper into prior problem areas.
Should you establish a repayment plan and keep to it, a good agency should make plans to report your progress on a monthly basis. A reduction of even a few dollars demonstrates financial resiliency to the bureaus and can boost your credit score.
Rebuilding your credit after a loan default
Rebuilding your credit after any negative financial situation is a long and difficult process. As previously established, negative information floats around on your credit report for at least seven years. However, the impact of it on your overall score lessens with time.
An individual late payment or two loses its impact after a couple of years . A charged off account gradually losses its negative consequences as it moves closer to falling off of the report. Any repayment plans gradually reduce your debts owed and as your overall debt utilization decreases, your score rises.
As you work on rebuilding your credit after a loan default, begin to explore other options for short term financial assistance. A credit card can provide you with access to needed funds for an emergency without the aggressive repayment schedule of a payday loan.
While interest will still be high, the monthly payment burden will be less and provide you with an opportunity to regain your financial footing. After you feel confident about your monetary situation, you can tackle the credit card debit month by month. In no time you can chip away at a several hundred dollar debt by directing additional money at your principal each month.
An additional bonus
An additional bonus is that the card is always available. As long as you have paid down your balance, it is easily reused the next time you need to make an unexpected expenditure. If you pursue a payday loan instead, each loan carries a new approval process, new fees and new terms. A credit card has specific terms clearly articulated in your cardholder agreement. An annual fee may be charged, but it is a one-time affair.
But before using a card, you shall definitely check which one is the best for you. This widget might be a good starting point to compare different credit cards:
Over the long term, you are building a healthy credit history to soften the negative consequences of a prior default on my payday loan. Gradually, the good replaces the bad all together. At this point, you may find yourself able to pursue more loan options, such as car loans or mortgages.
Establishing a safety net
As you work to pay off old debts or establish a new credit history to replace a payday loan default, consider saving. By establishing a cash based safety net you can easily access, your need for loans and credit gradually diminishes.
If you spent several years paying fees and interest to payday lenders and find yourself free, start depositing that money in a savings account. Over time, the funds can grow to a level adequate for providing yourself with a “payday loan.” When an emergency pops up, you can tap savings to pay the doctor, the dentist or your mechanic. If one of your children needs a new gadget for school or your pet needs surgery, you are able to afford it without credit.
You can still choose to use credit to keep your cash flow strong, but you are making a choice instead of facing only one option. Use a default on your payday loan as a building block for a stronger financial future that reduces your need for access to high-interest temporary funds.
About the Author – Ashley M
Ethan founded OfferEDGE in Dec 2013 with the mission to unify the financial quadrants through a system that allows businesses to be seen when consumers use a Single Sign On across Lending, Credit, Money and Real Estate. Taub invents the offers and IP, while overseeing all aspects of the company. He also has orchestrated the company’s earned media across the brands Loanry®, Cashry®, Debtry®, Budgetry®, Billry®, Taxry® and more. This includes over 500 publications that have been featured across the web.