What Happens if I Default on a Payday Loan?

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Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.

If you're in need of some fast cash to make it to your next paycheck, you may be thinking about taking out a payday loan. This may be particularly true if you don't have the best credit and can't get approved for other types of loans. While it's easy to get a payday loan, this financing option is very expensive.

Payday loans come with exorbitant interest rates and fees that often make them very difficult to repay. If you can't pay back a payday loan, the account may be sent to a collection agency, which will damage your credit.

What Happens if You Default on a Payday Loan

Failing to pay back a payday loan comes with a number of serious consequences, including:

  • Additional fees and interest: Depending on where you live and which lender you choose, you may face extra fees if you're unable to repay your payday loan. These fees are referred to as nonsufficient funds (NSF) fees and are charged when you lack the funds to cover a transaction.
  • Debt collection activity: Your lender will attempt to collect payment for you for about 60 days. If you're unable to pay them within this time frame, they'll likely turn to a third-party debt collection agency. You can expect the debt collection agency to call you and send you letters on a regular basis until they receive the money. You'll find that their collection efforts are far more aggressive than those of your lender.
  • Damaged credit score: If you repay your payday loan on time, your credit score shouldn't be affected. On the other hand, if you default on your loan and your debt is placed in the hands of a collection agency, you will see a dip in your score.
  • Court summons: Even if you defaulted on a small amount of money, there is a chance that a collection agency will take you to court. Depending on where you live, this may lead to liens against your property and even wage garnishment.
  • Difficulty securing future financing: Since a payday loan default can stay on your credit report for up to seven years, you may have a tough time getting approved for other loans down the road.
  • Arrest threats: Although it's illegal for a lender to threaten you with arrest or jail, they may do so anyway. If you receive this type of threat, be sure to consult your state attorney general's office right away.

How to Rebuild Credit After Defaulting on a Payday Loan

There's no denying that defaulting on a payday loan can bring you a great deal of stress and uncertainty about the future. The good news is that there are ways you can rebuild your credit and reduce the severity of the situation. Here are some tips to help you out.

  • Get current on payments: If you don't have the cash to get current on debt payments, you may want to reduce your expenses or take on a part-time job or side gig. You may also opt for professional help with credit counseling, a debt management plan (DMP) or debt consolidation.
  • Pay your bills on time: Unfortunately, even one missed payment can hurt your credit. So it's imperative to pay all your bills on time. If you're worried you'll forget, sign up for automatic payments or set calendar reminders. This way, you can ensure your mortgage, credit cards, car loans and other bills are paid in a timely manner.
  • Consider your credit utilization ratio: Your credit utilization ratio is the amount of credit you're using relative to the amount of credit available to you. Your credit utilization should be no more than 30%, and the lower, the better. Keeping your spending down and balances low can help you get there.
  • Check your credit report regularly: Make it a habit to monitor your credit report. You can visit AnnualCreditReport.com and get a free weekly copy of your Experian, Equifax and TransUnion reports. You can also get your Experian credit report for free every 30 days on sign-in. Look out for any derogatory marks that may be hurting your scores.

You Can Move Forward After Defaulting on a Payday Loan

If you default on a payday loan, you will have to work hard to rebuild your credit and get over this financial hurdle. There is, however, a silver lining. After going through this experience, you'll likely become a more responsible borrower and go out of your way to prevent similar financial problems in the future.