What Happens If You Don’t Pay Back a Payday Loan?

If you need cash quick and you don’t have any other options, you may have resorted to taking out a payday loan to pay your rent, to buy gas, or to buy food, until you get your paycheck. Regardless of the reason you took out a payday loan, the consequences of not paying back a payday loan are numerous and we will discuss them in much detail below.

What Happens If You Don’t Pay Back a Payday Loan?

If you don’t pay back a payday loan, your payday lender will first attempt to debit your bank amount for the amount due. If that fails, your payday loan lender may then sell the outstanding debt to a collection agency. The collection agency will then attempt to collect the debt from you by relentlessly reaching out to you. The collection agency may also add a collection account to your credit report, which will cause significant damage to your credit. The average collection account can drop your credit score by up to 100 points.

So, although taking out a payday loan does not appear on your credit report because credit checks are not usually performed, when you fail to pay them on time, you could quite frankly destroy your credit.

Once a collection account is added to your credit report, it will continue to show up for seven years from the date you became delinquent on the payday loan. After seven years pass, the collection account will be automatically removed from your credit report.

The collection account will continue to drag down your credit score so long as it remains on your credit report.

Having a collection account added to your credit report could cause significant damage to your credit because your payment history accounts for 35% of your credit score, and when a collection account is reported, this signals that you’re delinquent on making your payments on time, causing your credit score to drop significantly.

Alternatively, some payday loan lenders deal with those who don’t pay back a payday loan by filing a lawsuit against them, obtaining a judgment against them, and garnishing their paychecks until they have recovered the amount loaned to the person.

In the past, civil judgments used to appear on your credit report, causing significant damage to your credit score. However, they no longer appear on your credit report, but if a judgment is entered against you, the payday loan lender may be able to garnish your wages until you’ve paid back the amount they loaned you.

Consequences of Not Paying Back a Payday Loan

If you do not pay back a payday loan, you may face the following consequences:

  • Attempts to Collect – At first, payday loan lenders will relentlessly attempt to get into contact with you, calling you several times a day. If you provided any contacts when you obtained the loan, they will also contact them in an attempt to collect the money you borrowed.

  • Debiting your account – When you signed your payday loan agreement, you probably agreed to allow the payday loan lender to debit the amount due from your bank account. Payday loan lenders will begin by attempting to collect the full amount due. If that does not work, they may split the amount they want to deduct in smaller portions in order to extract as much money from you as possible.
  • Collection Account – In most cases, if you default on a payday loan, your debt will be sold to a collection agency, the collection agency will then add a collection account to your credit report, causing significant damage to your credit. Also, the collection agency will call you non-stop attempting to collect the outstanding debt from you.

  • Damage to your credit score – If a collection account is added to your credit report, this will cause significant damage to your credit score. Collection accounts can cause a drop of 100+ points in your credit score.

  • Interest & late fees – If you do not pay back a payday loan on time, your payday loan lenders will charge you late fees, as well as interest on the amount of money that you owe. As such, to avoid being charged such fees and interest, you should try your best to repay the money you borrowed on time.

  • Civil judgment – Some payday loan lenders will not sell your debt to collection agencies, instead, they may sue you in civil court, obtain a civil judgment against you, and proceed to garnish your wages until they’ve recovered the money that you borrowed. Civil judgments do not hurt your credit since they no longer appear on your credit report, however, your paycheck will have some money taken from it to repay the payday lender.

  • Difficulty obtaining credit cards and loans – If your payday loan is sent to collections, the collection agency will likely place a collection account on your credit report, causing significant damage to your credit. After a collection account is added to your credit report, it will be more difficult to obtain a credit card or loan once a creditor or lender sees the collection account and your lower credit score.

CSP Pro Tip: You should only take out a payday loan if it’s extremely necessary to do so and you have no other option. Payday loans are extremely expensive, costing almost $15 for every $100 borrowed over a 2 week period. Try taking out a personal loan, as most personal loans will have better terms than a payday loan.

Can You Be Arrested If You Don’t Pay Back a Payday Loan?

No, you will not be arrested for not paying back a payday loan. It is illegal for a payday loan lender to threaten you with an arrest. That said, it’s quite common for payday loan lenders to threaten consumers with jail time if they do not repay the debt.

If a payday lender threatens you with arrest, you should report them to your State’s Attorney General.

That said, the payday loan lender has the ability to sue you in civil court and obtain a civil judgment against you. If you are ordered to go to court and you fail to do so, you can be arrested and taken to jail for violating a court order.

That said, you should generally never violate or ignore a court order. If the court orders to appear, you should comply with the court’s request to do so.

What Should You Do If You Cannot Pay Back Your Payday Loan?

If you cannot pay back your payday loan, you should not ignore the situation in hopes that it will go away. The first option that may be available to you is extending the term of repayment by asking your payday lender to extend the amount of time that you have to repay the loan. Most payday lenders will agree to such a request, especially if they belong to the Community Financial Services Association of America. This option will help you avoid significant damage to your credit.

If you have good credit, the second option that you have is to take out a personal to pay down your payday loan and other debts that you may have. Personal loans typically come with a lengthier repayment term, giving you plenty of time to repay your debt. Also, personal loans typically have low interest rates, making repay them much easier than repaying a payday loan.

If you’re experiencing financial trouble, the third option that you have is to get help by contacting a credit counseling service. Such counselors will charge a fee to assess your current financial situation and will recommend the best source of action for you to take.

Credit Score Planet Frequently Asked Questions

1. What happens when you don’t pay a payday loan back?

When you do not pay back a payday loan, the lender will call you relentlessly attempting to collect the debt. If that does not work, they may sell your debt to a collection agency. The collection agency will then attempt to collect the debt from you and add a collection account to your credit report, which will cause significant damage to your credit score.

2. Can you be prosecuted for not paying back a payday loan?

No, you cannot be prosecuted for not paying back a payday loan. Payday lenders will often threaten you with arrest or prosecution but that’s illegal and you will never be arrested for merely failing to pay a payday loan.

3. Is not paying a payday loan a felony?

No, not paying a payday loan back is not a crime. You will not be prosecuted for failing to repay a payday loan.

4. What happens when a payday loan company takes you to court?

When a payday loan company takes you to court, they will attempt to obtain a civil judgment against you. If they’re successful, they will be able to garnish your wages, meaning they will deduct the money that you owe from your paycheck and you will not be able to stop them from doing so.

5. How long do payday loans stay on your credit?

If a payday loan is sent to collection and a collection account is added to your credit report, the collection account can remain on your credit report for 7 years from the date that you first became delinquent on paying back the payday loan.