How Does that Work-out if you go into Default on a Payday Loan?
Payday loans are a method of short-term lending that generally doesn’t require credit verification. The loan is due within 14 days after you get your next paycheck. This is the reason they’re often referred to as payday loans. In 2016, research revealed the number of 12 million Americans could take out payday loans each year in the hope of being in a position to pay for the loan before the next payday comes around. In the end, they have to pay $9 billion in fees for these loans, or the equivalent of $750 for each person.
The chance of defaulting on payday loans is high. In a separate study, half of payday loan customers will default on payday loans within two years after taking the loan for the first time.
What happens when defaults occur?
While payday loans usually don’t require credit checks, however, they typically require the postmark of a check or login to your bank account.
When the due date is reached for payday loans, you can either make the payment in person, or the lender will draw the outstanding balance out of the bank account. If the funds aren’t in your account at the time of payment, your bank fails to make the payment on the overdraft, and the lender continues trying to deduct the balance. When the loan is rejected because of insufficient funds, the bank will charge you an insufficient funds fee that will push you further into financial debt with your bank. At the same time, the payday lender attempts to collect money to repay your loan.
If the lender cannot draw the balance out of your account, they’ll start calling you to demand payments from you. They could email you, the phone you at work, or even contact your family members and friends to see if they can convince you of the money to pay. Meanwhile, an amount due on a payday loan could increase because fees, interest, or penalties get added.
If you cannot recover the loan, the payday lender will transfer your debt to a third-party debt collector. In the meantime, you’ll need to deal with a collection agency whose collections efforts could exceed those of the payday lender initially.
The impact on your credit
Your credit score was secure from the payday loan since no credit checks were conducted.
If the debt is assigned to an agency that collects debts, this debt is added to the credit file. Due to this, a default in the repayment of your payday loans could harm your credit score.
Effective Collection Strategies for Defaulted Payday Loans
The lender or collection agency can pursue you for the unpaid amount. A lawsuit may result in the entry of a judgment against you if the judge decides that you are legally bound to pay. In the event of a court judgment, the payday lender could be granted permission by the court to be able to garnish your wages or take over your bank account.
The best option in a lawsuit by a debt collection agency is to take legal advice.
Collectors of debt must cease contact with you when you ask to stop their calls. However, this doesn’t remove the debt. The debt could be transferred to another collection agency which may call you until you request to cease, and eventually, the debt is reported to credit agencies, and you may be sued for the amount owed.
Refraining from Payday loans
Payday loans are among the most expensive kinds of loans that you can get. They are also among the most challenging types of loans to repay. A typical payday loan holder is in the red for five months of the year. They end paying more than $500 in fees.
The price for payday loan loans is higher than other types of borrowing. However, the difference isn’t apparent since payday lenders do not disclose their rates per year. Instead, they let you know a fixed cost like $15 for every $100 borrowed. For a loan that is due within two weeks, this would be the APR being 400%. The typical APR for credit cards, by contrast, is 20 percent to 25 percent.
If you’re considering applying for an advance loan for payday, don’t. Explore every other option available, like selling things or borrowing money from a family or friend member, before making a decision to take out an advance loan to ensure you are not subject to the negative consequences of defaulting on payday loans.