What Happens if You Don’t Pay Back a Payday Loan?

Quick Answer

If you stop paying your payday loan, you could wind up owing even more money, the account could be sent to collections and your credit score could suffer.

Woman looking at bills and receipts on floor

If you don't pay back a payday loan, it could be sent to collections, leading to financial consequences that could impact your credit, cause fees to pile up and make your financial situation even more challenging.

Payday loans may seem convenient, but the typical cost is about $15 per $100 borrowed, which comes to an average annual percentage rate (APR) of almost 400% for a two-week loan. Understanding the potential outcomes of not repaying a payday loan and making a plan to repay it as soon as possible is crucial for staying on top of your finances.

What Happens if You Don't Pay Back a Payday Loan?

In general, you must repay your payday loan in one payment by your next payday. In states where it's allowed, some lenders may offer to roll over your payday loan into a new loan (with additional fees). If you stop paying on the loan, you could face the following repercussions.

Additional Fees

One of the first things that's likely to happen if you don't pay back a payday loan is the accumulation of fees. Payday lenders often charge sky-high finance charges and additional fees for late payments. These fees can quickly add up, making the total amount you owe much higher than the original loan amount.

The Debt Could Go to Collections

If you continue to miss payments on your payday loan, the lender might decide to send your debt to a collection agency. Once the debt is in collections, you'll likely start receiving calls and letters from collection agents attempting to collect the debt on behalf of the lender. Having a debt in collections can be stressful and disruptive to your life, and it may even lead to legal action if left unresolved.

Negative Impact on Credit Score

While payday lenders don't typically report to major credit bureaus, if your debt is sent to collections, the collection account can appear on your credit report and negatively affect your credit score. This can make it harder to get loans in the future.

Legal Action

Sometimes, lenders or collection agencies might take legal action to recover the unpaid debt. This could result in a court judgment against you, leading to wage garnishment or seizure of assets.

Financial and Emotional Stress

The ongoing pressure of dealing with unpaid debt, collections and the potential for legal action can lead to significant stress and anxiety. Dealing with the consequences of delinquent payday loans could lead to social isolation and emotional distress as you struggle to manage your financial situation.

Do Payday Loans Go on Your Credit Report?

Payday lenders typically don't report to the major credit bureaus. However, if your debt goes to collections, the collection agency may choose to report the delinquent debt. This negative information can stay on your credit report for up to seven years, affecting your credit score and making it harder to qualify for loans, credit cards or favorable interest rates in the future.

Six Options if You Can't Pay Back a Payday Loan

If you find yourself unable to repay a payday loan, there are several options available to help you navigate this challenging situation:

  1. Contact the lender. The first thing you should do is reach out to the lender to discuss your situation. Some lenders may be willing to work with you to establish a repayment plan or extend the due date. When you connect with the lender, ask about an extended payment plan (EPP). Many states require payday lenders to offer EPPs, which give payday loan borrowers extra time to repay the loan without penalty. Check to see if your lender provides this option.
  2. Seek community assistance. Some community organizations and nonprofit agencies offer financial assistance and counseling services. These resources can guide you in managing debt and improving your financial situation.
  3. Work with a nonprofit credit counselor. Nonprofit credit counseling agencies can help you create a budget, negotiate with creditors and develop a plan to repay your debts. They can provide expert advice tailored to your unique financial circumstances. Look for a reputable credit counseling agency through the Financial Counseling Association of America or the National Foundation for Credit Counseling. You can also view a list of approved credit counselors through the U.S. Department of Justice.
  4. Increase your income. Consider finding additional sources of income to help you cover your expenses and repay your debts. This could involve taking on a part-time job or side hustle, freelancing or selling items you no longer need.
  5. Cut your expenses. Analyze your budget carefully. If there's anything you can cut back on, do it right away and put the savings toward the payday loan debt.
  6. Borrow from a friend or family member. If someone close to you has spare cash, you may want to approach that person for a short-term loan. Use it to get rid of the payday loan, then pay off the person as agreed.

Know that you have options if you feel like you can't pay back your loan. Whatever you choose to do, however, avoid taking out another payday loan (or similar high-interest loan) to cover the old one.

What to Do if Your Payday Loan Goes Into Collections

If your payday loan debt goes into collections, it's essential to take swift action to address the situation. Here's what to do if your account goes to collections.

  • Validate the debt. Request validation of the debt from the collection agency. They're required to provide documentation that proves you owe the debt.
  • Consider negotiating a settlement. If you genuinely can't repay the total amount, you might be able to negotiate a settlement with the collection agency. Be sure to get any agreement in writing before making a payment. Negotiating to pay less than you owe can hurt your credit.
  • Know your rights. Familiarize yourself with your rights under the Fair Debt Collection Practices Act (FDCPA). Debt collectors must follow specific guidelines when attempting to collect a debt, such as only contacting you during certain hours and not calling you at work if you are not allowed to accept calls there.
  • Consider professional help. If you're overwhelmed by the collection process, consider consulting with an attorney specializing in debt and consumer rights.

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The Bottom Line

Failing to pay back a payday loan can lead to a cycle of financial challenges difficult to overcome. To avoid the consequences of not repaying a payday loan, explore your options and take steps to address the debt. Contact your lender, seek assistance from community organizations and consider working with a nonprofit credit counselor to create a plan that helps you regain control of your financial situation. Lastly, make it a priority to create a solid financial plan so you won't find yourself in the same bind in the future.