When people take out payday loans, they are frequently in precarious financial situations. Thus, it’s no surprise than many people who take out payday loans end up being unable to pay back their payday loans according to the terms that they agreed to.
While the regulations regarding payday loans vary from state to state, there isn’t any state or jurisdiction where a consumer may simply stop paying a payday loan without any consequences.
In this article, there will be a complete discussion of what happens if a person neglects to pay back a payday loan, beginning with the first step of the process: going into default on the loan.
Also Read: How to Consolidate Your Payday Loans
Going Into Default
Initially, what happens if you don’t pay back a payday loan is that the loan goes into default. When someone goes into default on a loan, the process begins when they miss a payment or underpay on the remaining balance.
In some cases, going into default may be the result of an accident or forgetting to pay. However, loan companies do not necessarily care about the reason why the borrower’s loan is in default.
Once a loan enters into default, the lenders have a variety of options to pursue to get their money back. Typically, lenders execute these options somewhat simultaneously so as to maximize the chance that one of their chosen methods sticks and gets the borrower to repay the loan.
The first thing that happens when a person defaults on their payday loan is most commonly a penalty fee. The penalty fee is levied by the provider of the loan and is described in the loan’s term sheet. While the interest of the loan may continue to accrue while the loan is in default, the penalty fee is only incurred once per payment period with most payday loans.
A standard penalty fee for a payday loan is in the range of $15 to $50, but most fall around $35, meaning that they are similar to the cost of a bank overdraft charge. Unlike bank overdraft charges, however, consumers typically find it challenging to get a payday loan penalty fee reversed.
Once the lender realizes that the borrower’s loan is in default, they may be entitled to withdraw money directly from the borrower’s bank account. This can only occur if the borrower was forced to give their bank account information to the lender as part of the terms of getting the loan. However, such requirements are common for payday loans, meaning that bank withdrawals are often part of what happens if a borrower does not pay back a payday loan.
When the lender exercises their right to withdraw funds from the borrower’s bank account, several things can occur. First, the funds may be withdrawn successfully by a bank transfer without incident. In this case, the borrower’s money is removed without any additional issues or fees, though they will still need to pay the penalty fee, which will not be automatically removed.
More commonly, the balance remaining in the borrower’s bank account will be less than what the lender requires to settle the payday loan debt. Unfortunately, this case is worse for the borrower, as the lender will still attempt to withdraw the money from the borrower’s account, thereby incurring overdraft charges.
In some situations, the borrower can experience multiple overdraft charges from the same incident, leaving them substantially in the red before taking their remaining payday loan debt into account.
The final possible case is that the lender attempts to withdraw funds from the borrower’s bank account, but they are stopped by legal interventions on the borrower’s behalf. These legal interventions can range from those executed by a lawyer or consumer debt advocate to a simple withdrawal of permission to access the bank account as a result of the borrower’s initiative.
Assuming that the borrower cannot get the remaining amount due on the payday loan, they will proceed to the next step of the process.
Initial collections calls and recovery attempts will be initiated by the lender if they cannot successfully remove all of the money they need from the borrower’s bank account. The initial collections process involves contacting the borrower on all available communications channels to demand repayment.
It may also involve the lender contacting the references of the borrower to ask for the borrower’s location or their financial disposition, though they cannot legally disclose why they are calling.
The purpose of the initial collections phase is to let the borrower know that the lender is looking for their money to be repaid. If the borrower cannot repay the cash despite the steps which the lender has already taken, the lender will proceed to more aggressive methods.
Lawsuits are the primary way that lenders ensure that payday loan borrowers pay back the money that they owe. Debt collection lawsuits establish several things:
- The lender’s claim to the borrower’s funds is legitimate
- The borrower’s repayment contract with the lender is breached as a result of actions or lack of action by the borrower
- The borrower is capable of paying back the debt to the lender when taking their liquid funds and assets into account
- The borrower is unwilling or unable to pay back the lender using liquid funds under the terms described in the contract with the lender
Most of the time, debt collection lawsuits are served to borrowers by mail. The borrower receives a notice indicating that they are being sued by the lender as a result of their breach of the payday loan contract. Then, the court sends a summons to both the borrower and the lender.
The summons describes the date on which the trial will occur. Because payday loan defaults are civil suits rather than criminal suits, borrowers can’t go to jail if they don’t pay their payday loan. However, borrowers can still have their assets seized in whole or in part if the judge rules that the lender deserves to have them.
Most of the time, consumers do not appear at their trial. Subsequently, judges rule in favor of the lender by default, as the borrower is not present to contest the case and present any evidence which might indicate that they are not in default on the loan.
This means that in the course of the trial, the lender can request more or less whatever actions they want to get their funds back from the borrower. In most cases, this involves assets being sent to repossession for collections, wage garnishment, placing liens on the borrower’s most illiquid assets to seize ownership of them, and other similar measures.
Importantly, the lawsuit against the borrower only establishes that the lender is entitled to take the actions that they argue in favor of to get their money back. The lawsuit does not necessarily mean that the lender will actually take the actions which they say they want to do.
However, for legally complex actions like emplacing liens on houses, few lenders go through the trouble of requesting one in court unless they intend to follow up on it.
Once the lender has a court order, they can garnish the wages of the person who is in default. This means that wage garnishment can only occur in the aftermath of a successful lawsuit by the lender in which they argue that they are entitled to be repaid by the borrower’s income. This is legal because the borrower is refusing to pay the payday loan on the terms that were originally agreed upon.
If wage garnishment isn’t going to be enough to repay the loan on a timetable that suits the lender, the lender can push for the debt to be taken to collections.
When debt is taken to collections, several things occur. First, the lenders may be able to repossess capital assets which have fixed and calculable valuations. Capital assets with calculable valuations most typically include things like vehicles, televisions, and other home electronics. In some situations, cell phones and furniture may fall under the reach of collections in the context of repaying a payday loan debt.
As part of the collections process, lenders can also attempt to place a lien on major assets that the borrower has, like houses. Liens mean that the lender gains a rightful stake in the ownership of an asset to make up for the debt which the borrower owes them. Typically, liens are placed on houses, though liens on other mortgage-backed securities like land and productive capital may also occur depending on the circumstances.
Escaping A Payday Loan Cycle
The collections process concludes the breakdown of what happens when you don’t pay back a payday loan. Importantly, the APR of a payday loan does not stop accruing when the loan is in default in some cases. This means that the collections process can continue on for an indefinite period if the borrower does not take action to reduce the size of their principal.
Many borrowers require legal help to make sufficient headway against their unpaid payday loan debt, so it’s essential not to be too shy to reach out for help.
Read Next: 11 Ways to Get Out of the Payday Debt Cycle