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What happens when you can’t repay a payday loan?

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Most of the time, people get a payday loan because they can’t get quick funding elsewhere. Unfortunately, the financial situation may get even worse if the borrower is not able to repay what they owe.

Depending on how long it’s been since you received the loan, the lender could threaten to file a lawsuit against you and garnish your wages. Borrowers in this situation do have options that could potentially help.

What can happen if you don’t repay a payday loan

While every situation may have some differences, there are some typical consequences when you don’t repay a payday loan on time.

Withdrawals from your bank account 

Most lenders repeatedly attempt to withdraw the funds from your bank account, as allowed per the loan agreement terms. If the transactions are declined by your bank due to insufficient funds, the lender may initiate withdrawals for smaller amounts.

Even if the lender collects a portion of the outstanding balance using this method, you could still face financial difficulties if other banking transactions are declined. Plus, the bank fees could pile up, costing you several hundred dollars in a short period.

Collection agencies getting involved

You can expect the lender to initiate collection efforts, including repeated calls and letters demanding payment, while continuously attempting to draft your account. The lender could also sell your debt to a collection agency or hire an attorney to collect what’s owed.

You may be able to halt collection actions by requesting an extension from the lender. Select states have laws that mandate payday lenders to grant extended payment plans to borrowers if requested. Be mindful that these extensions often come with additional fees and interest.

Credit score dropping 

The lender could also report the delinquent account to the credit bureaus once it’s turned over to a collection agency. Your credit score will likely take a dip, and the negative mark will remain on your credit report for up to seven years. Consequently, you could find it challenging to secure competitive financing offers in the future.

You can take some action to start rebuilding your credit score after defaulting on a payday loan. First, review your credit report to identify any other past-due accounts, and bring them current since payment history is the largest component of your credit score. You also want to look for errors and dispute them promptly.

Also, adjust your spending plan to free up funds that you can use to start paying down credit card debts in the near future. You want to do this to reduce your credit utilization ratio, or the amount of revolving credit you have in use, as it accounts for 30 percent of your credit score.

Most importantly, keep tabs on your credit report and practice responsible debt management habits over time to give your credit score the best chance at strengthening over time.

Negotiations with the lender

It’s far less costly for the lender to collect than to sue you in a court of law, and selling the balance to a debt collector for pennies on the dollar means the lender will only get a small percentage of what’s owed.

Both circumstances give you the leverage needed to possibly settle the payday loan debt for a fraction of the outstanding balance. Offer an amount you can afford to pay in a lump sum and mention your intention to file for bankruptcy if the lender isn’t willing to budge. The lender may be willing to compromise with you since bankruptcy means they may not have the chance to collect.

Lawsuit from the lender

If the lender takes you to court, the burden of proof is on them to prove that you owe the debt. Simply request that they provide documentation or the agreement you signed when you took out the loan. If the debt collector cannot provide this information, the judge will likely dismiss the case. But if the lender proves you owe and secure a judgment from the courts, you could be ordered to pay or have your wages garnished.

Quick note: If the lender threatens to have you thrown in jail, reach out to your state attorney general’s office promptly to file a complaint.

How to get the money to repay a payday loan

Instead of ignoring a delinquent payday loan and possibly ruining your credit, consider these options to repay the debt:

  • Apply for a peer-to-peer loan. If your credit score is low, a peer-to-peer loan is worth considering. You’ll find these loan products on online lending marketplaces that match potential borrowers with investors looking to lend funds to you in exchange for a return. You can generally compare multiple loans with one application, and you’ll typically need to provide proof of income or assets to get approved.
  • Get a debt consolidation loan. A debt consolidation loan lets you roll high-interest debts into a single loan product with a lower interest rate. Most debt consolidation loans have a fixed interest rate, and you’ll make equal monthly payments over a set period. The most competitive loan terms are reserved for borrowers with good or excellent credit. Even with less optimal credit scores, your rate could be lower than what you received with the payday loan.
  • Consider a short-term emergency loan. Credit unions and select community banks commonly offer short-term emergency loans as payday loan alternatives. They’re usually available with slightly lower interest rates and for small dollar amounts, capped at $1,000, and may not require a credit check for approval.
  • Enroll in a debt management plan (DMP). It should be used as a last resort if you’ve exhausted all your options. DMPs are available through non-profit agencies. A credit counselor will reach out to the payday lender on your behalf to negotiate a modified repayment plan that works for your budget. You’ll pay the loan’s principal balance in full, but the downside is that enrolling in a DMP could prompt other creditors to close your credit card accounts, causing further credit damage.

You could also try talking to friends and family or looking for ways to adjust your finances to cover expenses such as temporarily cancelling streaming subscriptions, switching to a lower food budget.

Written by
Allison Martin
Allison Martin's work began over 10 years ago as a digital content strategist, and she’s since been published in several leading financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews, Investopedia, Experian and
Edited by
Loans Editor, Former Insurance Editor