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When used prudently, payday loans can help you out of a financial jam. Maybe you need money to cover an essential car repair so you can drive to work, or purchase a plane ticket to see a loved one in need. As long as you have a job, you can borrow against the funds from your upcoming paycheck—for a price, of course.
In fact, the prohibitive cost of payday loans should make them a borrower's last resort. According to the Consumer Finance Protection Bureau, a typical two-week payday loan is $15 per $100 borrowed—which translates to an almost 400% annual percentage rate (APR)! The cost can make sense if you repay the loan within two weeks, but troubles will ensue when you don't. Rolling the debt over to the next two-week period will result in another set of fees, which you will have to pay to keep the loan in good standing. And if you stop paying your payday loan? Your problems will magnify quickly.
How Payday Loans Can Impact Your Credit
Payday loans are not listed on credit reports. Payday lenders don't usually conduct credit checks on applicants, so applying for one won't show up as a hard inquiry on your credit report, and they won't notify the credit reporting agencies when you get one. Because these loans fall under the radar, they neither help nor hinder your credit history if you pay them off as agreed.
That all changes when the account goes delinquent, however. Fall behind on payments and the lender may sell the account to a third-party collection agency. At that stage, the bad debt will almost certainly show up on your credit reports because most collectors furnish information to the credit reporting agencies. If that happens, it will stay in your credit file for seven years and be negatively factored into your credit scores. Payment history is the most important credit scoring consideration, and when an account goes into collections, it's a clear indication that you didn't pay your bill as agreed. As a result, your scores will sink.
Some payday lenders deal with people who flee from their obligations by filing a lawsuit. If the lender wins the case, a judgment will be filed. Experian does not list these judgments, but other credit reporting agencies do, and they will list it in the public record section of your credit report. There it will stay for seven years from the date it was filed.
Options for Paying Your Payday Loans
Because payday loans are expensive and the consequences of falling behind are severe, it's best to make these types of debts a priority while the loan is still in good standing and absent from your credit reports. If you're struggling financially (which may be the reason you got the loan in the first place), this could be challenging. Some methods to consider:
- Sell unnecessary property. Look around your home and yard. Is there anything of value that you don't need? If you can sell it, apply proceeds to the amount you owe.
- Bring in extra income. Perhaps you can work overtime or get a temporary part-time job. Babysit, walk dogs, join the gig economy by driving for a car share company. Weigh your possibilities.
- Pare down expenses. Analyze your budget carefully. If there is anything you can eliminate or reduce, do so, and put the savings toward this debt.
- Borrow from a friend or family member. If there is anybody in your life who has spare cash, you may want to approach that person for a short-term loan. Use it to delete the payday loan, then pay off the person as agreed.
- 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. Lenders who are members of the Community Financial Services Association of America pledge to offer EPPs to payday loan borrowers having trouble paying their loans, but others don't. Check to see if your lender provides this option.
What to Do if Your Payday Loan Goes Into Collections
If all that fails and the delinquent payday loan gets routed to collections, you have another potential opportunity. Instead of paying the full debt, you may be able to negotiate the balance down.
Third-party collectors purchase debts at a discount and then try to collect the total amount due. However, if you can come to an agreement with the collector where they still make a profit and you pay less than you owe, you both win—sort of. The downside to this option is that it will show up on your credit report as "settled," which doesn't look as attractive as "paid in full," so you will have to evaluate the financial benefit against the credit report imperfection. However you deal with a collection account, though, it will remain on your credit report for the same seven years.
It's also a wise idea to visit a nonprofit credit counseling agency. These organizations provide free financial counseling to the public. They can assist you with developing a budget so you can handle your liabilities. If you can afford to cover your basic living expenses and have some money left over, you may be able to use their debt management plan. This is a program where you send one payment to the agency, and they disburse the funds to your creditors, which can include a payday loan collector.
And if you're sued by your payday lender for non-payment? Chances are the amount you owe will have grown, and now will have additional court and attorneys fees, so prepare yourself for sticker shock. To deal with this type of debt, you can pay it in full or work out an installment payment plan. In some cases the judgment creditor (the payday lender that sued you) is allowed to extract a portion of your paycheck with a wage garnishment, but you may be able to modify the amount it takes by filing a claim of exemption.
If you're worried that you will not be able to quickly repay a payday loan, consider it a sign that it's not a good idea in the first place and seek other options, such as borrowing from family or friends, or getting a personal loan. Payday loans work only in certain circumstances. You have to be sure that you'll delete the borrowed sum with your next paycheck, and that the payment won't leave you so short on upcoming expenses that you'll have to return for another advance. That's a vicious cycle you don't want to enter.