What Happens If You Default On Payday Loan?


More than 12 million Americans will seek out a payday lender to get cash in 2019. This usually takes the form of a payday loan or cash advance. The majority of people intend to repay the loan on time and in full. As we all know, life happens. You have an unexpected expense, your job is lost, and your debt payments slip your mind.

No matter what the reason, you may not be able to repay your small loans as planned. Before you know what, your loan is in a frightening state of default or collections. You start to receive threatening messages from the payday lender or the collection agency. This can feel overwhelming.

Don’t panic if you find yourself in such a situation. You can take comfort knowing that you are not the only one in this situation – an estimated 71 million Americans have at most one debt in collections. This article will explain what happens to a payday loan online or brick-and-mortar and provide strategies for managing the situation.

Do you need a refresher course on payday loans? This brief overview of payday loans will give you a good understanding.

Terminology of Payday Loan Statuses

Let’s start with some terminology. Many lenders, such as a bank, credit union, or IPASS, use the same terminology to describe different states or statuses of loans, regardless of whether they are a personal loan or a short-term loan or payday loan, student loan, or credit card. It is crucial to be familiar with the terms of financial institutions and what they may mean when managing your loan.

  • Current – Yay! This is the best loan status. You have no outstanding payments, and your fees are current. All payments will be reported by the credit bureaus as made on time. You would be in a Current state in an ideal world.

  • Late – A minimum of 15 days have passed since one or more of your loan payments were due. Lenders may further simplify this by separating Late statuses into Late (16-30) and Late (31-45). Regardless of what you think, Late means that you are slightly behind in your payments. You may be subject to additional late fees depending on your loan and could see negative credit impacts. A Late status can be used to catch up to a current situation or finish your loan term with a paid on-time rate.

  • Default – A payment(s) that has been unpaid for a prolonged period. The lender will determine the exact amount, but it is usually at least 60 days late. IPASS considers payment in default if it is more than 60 days late than the original payment date. A customer who defaults on a loan is more likely to suffer adverse credit effects and increased fees. In some states, such as Washington, Lenders are required to report any customer who is in default to a state

database. This will stop customers from applying for new payday loans. Other lenders cannot offer a loan to the customer until the original loan is paid in full.

  • Charged-off – Although technically an accounting term, it can be used to describe a loan that is not paid in full. When there is a reasonable expectation the loan will not be fully paid, a loan becomes charged off. This expectation is accounted for by the loan originator, who marks the loan as a loss in his accounting records. This usually happens before the loan is sent to Collections. A customer who has a loan in default of payment will likely experience more adverse credit effects.
  • Collections – The loan originator decides that they no longer believe they can recover the money and sell the loan to a third-party collection company to immediately collect the cash. All communications regarding the loan will be transferred to the collections agency. The collections agency’s primary goal is to get the customer paying something, even if it is a small amount of the outstanding loan amount. This is known as “Settling” in the industry. However, credit bureaus will report the loan as ‘Settled’ if the customer settles.
  • Closed or Paid Off – These terms are often interchangeable. They mean that your loan is paid in full and you have no outstanding payments. 

What to do if you can’t repay a payday loan?

Let’s now look at the basics of payday loans.

Over time, the severity of inbound messages increases

It’s not surprising that you will receive a message from your lender within minutes of taking out the payday loan. The payday lender will usually send you a notification immediately after the failure to make the first payment. These messages will contain instructions about what to do next and how you can make a payment.

This expectation is that you, the customer, will take action regarding the loan, such as making payment. These messages will likely increase in severity and frequency if you don’t. You probably signed an Electronic Communication Agreement (ECA) when you borrowed the money.

The lender will reach you via email, SMS, voice, push notifications, and postal mail. These messages can be overwhelming. Lenders are most interested in engagement from you. Engage with the lender to communicate your plans to repay the loan. Working with the lender proactively may lead to more flexibility, less stress, and a better final result even if you cannot refund the entire payment immediately.

Transfer to collections

You will likely be given to a third-party collection agency if you fail to take action on a loan. The original lender will usually send you one final email asking for payment before informing you that the loan has been transferred to a collection agency.

Expect a slew of messages once your loan is transferred to a collection agency. Many of these agencies use advanced automated messaging systems to send messages that follow a specific logic. Their primary goal is to get you to repay at least a portion of the loan.

You will probably be able to negotiate a cash settlement amount that is only a fraction of the amount owed on the loan. Bad news: Credit bureaus might report your settlement status if it is accepted. Because settling means that you have not paid back the entire amount of the loan. This can affect your credit score and limit your ability to obtain loans in the future.

We recommend that you contact the collection agency to make an offer to settle. You might be able to pay the loan off at a fraction of the original cost if they agree.

What about Jail Time?

While defaulting on loans can have many negative consequences, you can rest assured that your loan will be paid back. In some states, professional licensure or certifications may be suspended due to certain debts.

If your creditors bring you to court and ignore the court proceedings, you could face a warrant for your arrest. Consult a lawyer if you are concerned about IPASS’s legal implications.

Payday loan defaults have devastating consequences

Payday lenders have minimal legal rights to recover payments on payday loans. These loans are, by nature, unsecured. Despite this, you need to be aware of the negative consequences.

  • Credit – Payday lenders now report the status of their payday loans to credit bureaus. This is a significant benefit for most customers as it helps build credit through IPASS loans. However, if you cannot repay a payday loan on time, you could experience negative credit impacts. These adverse effects will only get worse the longer you delay paying back. If a lender does a credit check on you, you may be surprised at how much your credit score has dropped.
  • Additional fees/interest – Your lender and your state may charge you additional fees or interest rates if you cannot repay the loan. The lender may charge additional fees for non-sufficient funds fees (NSF) if you fail to make a payment. Some states permit lenders to charge different interests on unpaid amounts. This means that the interest rate on your payments will rise the longer you wait before making a repayment.
  • It will be harder to get loans in the future. – Failure to repay your loan on time could impact your ability to borrow short-term funds in the future. Payday lenders can check your credit reports (even soft pulls!) to determine if you have ever paid payday loans. Bank transaction data analysis. It’s essential to repay your loans if you want to be eligible for a future payday loan. You will have limited options for short-term credit and lending in the future if you default on your loan. This could impact your ability to get a debit card, credit card, or checking account in the future.


  • Stress and anxiety can be constant problems –  Having to deal with Payday loan debt or any other type of loan debt can cause many people to feel more stressed and anxious. It is called a debt-stress syndrome. Although it is easy to overlook the impact of payday loans, many people find this a real problem. You can seek professional help if you feel stressed or anxious about your financial situation. If you do your research, you will find that there are many non-profit credit counseling services available.
  • Texas payday lenders resort to criminal prosecution – Although this is not a common practice in Texas, some payday lenders in Texas use state theft and lousy check laws to criminally prosecute customers. They argue that delinquent borrowers have committed fraud or theft.

There are strategies to manage your debt situation

You have options, no matter how dire your situation might seem. We’ll be discussing plans for managing payday loan debt in the following section. This IPASS article is an excellent resource for general advice on debt management. ): 7 Tips to Get Out Of Debt.

Learn the actual cost of each debt before you decide to pay it off. You may need to address other obligations if you find yourself in a position where you cannot repay your payday loan. It is a good idea to go through all your debt and identify the following information: fees, interest, finance charges, amount outstanding, due dates, and finance cost. There are two options: Paying off small debt quickly or paying the highest good from what you have in your bank checking account, both of which can be a quick win. You can also consolidate your payday loan debt with personal loans.

To compare apples to apples, calculate the annual percentage rates (APRs) for your debt. IPASS believes that people should maximize their long-term financial health and focus first on loans with the highest interest & fees.

Ask your lender to offer an extended repayment plan. – Most financial institutions and lenders are subject to state regulations regarding repayment plans. You may be eligible for a comprehensive repayment plan depending on where you live. These plans allow customers to repay the loan over a more extended period without additional interest or fees. You may also be able to split your payments. In Idaho, for example, comprehensive repayment plans must provide at least four (4) equal payments over not less than sixty (60) calendar days.” For more information, contact your lender, or visit the online state department of financial regulation.

Check with the lender to see if they allow for a grace period. –  Some lenders offer extended repayment plans that include a grace period. These grace periods allow customers more flexibility regarding the timing of money being withdrawn from their accounts. The underlying loan payment dates may not change. Still, the Automatic Clearing House instructions (ACH) can be changed (e.g., The underlying payment dates on the loan contract may not change, but the date of the Automatic Clearing House (ACH) instructions (i.e., the date that the money is withdrawn from your account) can. For more information, please contact your lender to find out if grace periods are available.

You can refinance the amount you owe with a new loan in some states –  This approach is not recommended as it can lead to further debt and possibly send people into debt spirals. This should not be done unless you are sure that you can repay both your original loan and the rollover loan. IPASS believes that rollovers can trap borrowers in destructive debt cycles. We do not offer rollovers in any of the states in which we operate.

If you are in an unfavorable financial situation for a fraction of what it costs, you can settle with a collection agency. Your loan may end up with a collection agency. These agencies can be negotiated with if this happens. They are only interested in receiving money from you. Make an offer to them and wait to see if you accept it.

You can save money and make monthly payments – Budgeting, saving, and making a payment is the best thing that you can do. It is unlikely that this debt will disappear anytime soon. It is best to devise a plan to save enough money to pay off the balance.

How to rebuild credit following a default on a payday loan?

Payday loan default can be like hitting rock bottom. Credit score reconstruction will be necessary.

The good news is that credit scores can only improve from here. There are simple steps you can take to get started.

You must first reflect on your current credit situation. Then, ask yourself the question: “Why did I get in a default situation?” Financial problems are not something that can be fixed overnight.

It’s important to look at your expenses, both past, and present, and find areas that can be cut or saved. You may also want to consult a third-party financial advisor during this time.

After self-reflection, prioritize your current bills and take all steps to avoid defaulting with other credit lines. Although this can be difficult, it will help you create a more manageable environment. You don’t want to make other financial obligations after you have defaulted on your payday loan.

It is essential to prioritize your credit card payments. High-interest credit cards are the best option. To pay these cards off faster, you might want to explore other income streams.

Credit reporting agencies want you to show that your financial situation is improving. Paying off high-interest loans at a low-interest rate is the best way to do this. You will be able to pay off your loans faster and cut down on your living expenses, making you more appealing to other borrowers.


What does IPASS think about defaulting and collections?

Understanding our Core Values, Empower with Trust and Serve with Empathy, will help you understand how we approach fund recovery at IPASS, a payday lending alternative, is key. These values are crucial to how IPASS thinks about collections and fund collection.

As the Core Values article explains, we trust one another and want to establish deep and lasting relationships with our customers. This trust is reciprocal. Customers place a lot of faith in us, and we put a lot in them. Trust is the core of our approach to funding collection and recovery.

We trust that most people who apply for a loan from us will repay it. This is the core of how we approach fund collection. This is evident in our messaging to customers who are late or defaulting on payments. Our messaging to customers should reflect this trust.

We are also working on a fund recovery approach that places us in our customers’ shoes, especially as it relates to ‘Serve with Empathy. This is done in two ways:

  1. If we are confident that the customer will have enough income to pay the payment, we won’t attempt to retry failed payments. We try to imagine ourselves as a customer. Overdrafts are very real, and we don’t want to cause them for our customers.
  2. If we attempt to re-attempt a payment that was not successful, we try to notify customers in advance. We give customers enough time to inform us if we attempt to make a payment again.

These aren’t legal requirements, but we have determined that these are the right things to be doing.