What happens when you can’t pay off a payday loan?


You have been made redundant but you still have to pay rent. You’re running out of payment for your car and need a little extra help. Your electricity has been cut off and you must find a way to pay your overdue bill to turn it back on.

Sometimes you need a little cash to get by. So, you get a payday loan and solve your bills. But what happens when you can’t pay off a payday loan? Here’s what to do if you get caught up in that borrowing pickle.

What is a payday loan?

A payday loan is a short-term loan taken out for a small amount, usually $ 500 or less. Depending on the state laws, you can get payday loans in person or online.

You take out a payday loan by writing a post-dated check for the total balance including fees and interest that will add up when the loan is due. You can also allow the lender to automatically debit your full bank account balance on the due date.

Payday lenders can charge hefty fees in exchange for the money you borrow. Mike Sullivan, personal finance consultant for credit counseling agency Take Charge America, said the APRs are around 400%. It can be difficult to stay up to date on your bills and loan with such high interest.

“A 14-day $ 200 loan may require a payment of $ 235 or $ 35 [in] interest, ”Sullivan said. “Borrowers usually focus on the payment amount and ignore the full cost. “

What happens when you can’t pay off a payday loan?

According to The Pew Charitable Trusts, Americans spend $ 30 billion a year borrowing from payday lenders and other small lenders. So if you have taken out a personal loan and are struggling to pay it back, you are not alone. Payday loans disproportionately affect underserved communities, where individuals may not have the resources to use traditional financial institutions, such as banks and credit unions.

“Payday loans are typically taken out by people with very poor credit who cannot find money for immediate needs, such as food, gas or rent,” Sullivan said. “These borrowers often have no other options for borrowing.”

When you take out a payday loan, many lenders don’t check your credit or care about your financial situation. If you don’t have stellar credit, this might sound like a good thing. But that will only send you into deeper financial despair.

“Payday loans are a trap, and there’s not much a borrower can do when they’re trapped,” Sullivan said. “At some point, these loans often become unbearable and the borrower defaults.”

Default is when you can’t pay off your loans on time. This can lead to a drop in your credit rating, garnishment of your salary, and future loans with high interest rates. Your loan could also be turned over to a debt collector, who will work to get you paid off all of your debt. Do your best to avoid defaulting on your payday loans.

What to do if you can’t pay off your payday loan

If you’re struggling to get out of the payday loan cycle, here’s how to get out of it.

1. Check your debt

Review all your debts, from your payday loan to overdue bills. Focus on those with the highest interest rates. With high rates, the longer you take to pay off the debt, the more money you will end up paying.

2. Extend your repayment plan

Ask your lender for an extended payment plan, which is usually granted if your lender is a member of the Community Financial Services Association of America. However, you must apply for an extension before the last due day of your loan.

You will also sign an amendment to your loan agreement. Read it and make sure you understand the new terms and interest rates you agree to. You may be able to get a few extra weeks to pay off your loan.

3. Consider a personal loan

Don’t be afraid of the big banks, at least not when it comes to personal loans. Payday loans and personal loans may look similar, but they are not the same. Make sure you know the difference between personal loans and payday loans.

Taking out a personal loan can help you pay off your debt. These loans have much lower interest rates and longer repayment terms than payday loans. If you have poor credit, you’ll be happy to hear that you can even find personal loans for credit scores below 550.

4. Try a credit union

Credit unions and payday lenders have a lot in common. You can usually find one near you that offers small payment loans that can help you make large payments. Many credit unions have Alternative Payday Loans (ALP) for members.

Although you need to be a member of a credit union for at least a month, you can get anywhere from $ 200 to $ 1,000 with terms of one to six months. The interest rate for a PAL is much lower than the interest rate for a payday loan, up to 28%.

5. Get help

When you’re in a tough spot, it’s always a good idea to get help, whether it’s a credit counselor or a co-signer on a loan. Asking for help is an important step in getting started.

You can get help from the National Federation of Credit Counseling. Make an appointment with someone who can directly assess your financial situation.

If you are trying to get a personal loan and your credit score is not good, you may want to find a co-signer. A co-signer can be helpful, but remember that the loan will impact both of you. You both need to be careful when taking out a loan together.

If you have friends and family who can help in a pinch, use their resources. It is much easier to repay loved ones than a payday lender.

Find your freedom

You could consider a payday loan, but you don’t need it. When you cannot pay off a payday loan, there are many alternatives that you can consider. If you already have one, be careful and know your rights. Explore ways to pay it off as soon as possible so you don’t get trapped in debt.

Forget about filling out tons of forms. Finding your best personal loan rate is now easier than ever.

Disclaimer: Student Loan Hero is a subsidiary of LendingTree.

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Student Loan Hero is indemnified by the companies present on this site and this compensation may have an impact on how and where the offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the market.

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Student Loan Hero is an ad-supported comparison service. The site presents products from our partners as well as institutions that are not advertising partners. While we endeavor to include the best offers available to the general public, we do not guarantee that this information represents all products available.

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Bonny J. Streater