When You Default on a Payday Loan, Very Bad Things Happen
While defaulting on traditional loans can have lasting consequences, the fallout usually pales in comparison to what can happen when you fail to repay a payday loan. When you default on a payday loan, very bad things happen. Things like being required to spend a day in court, having your wages garnished and negative reports showing up against your credit rating occur when you neglect a payday loan payment.
Defaulting on Payday Loans Comes with Some Extremely Negative Consequences
NerdWallet reports that you’ll be in for extremely negative consequences when you default on a payday loan payment. Even if you borrowed a mere $300, very bad things are likely to happen. Bruce McClary, of the National Foundation for Credit Counseling, said, “If you have a valid, binding, legal agreement to pay that debt, and you’re in a state where they can sue you and attack your wages, you’re playing a game of chicken that you’re going to lose.”
What Can you Expect Following a Bad Credit Payday Loan Default?
During the first stage of the default, the lender is going to call you, and they’re going to call you right away and frequently. Short-term lenders are also likely to begin the process of automatically withdrawing the money that you owe from your checking account. Most payday loan lenders require your banking information (with your consent) to issue the loan, so they’ll have it on file when you fail to make your payment.
If their debit request doesn’t go through your bank account, they may decrease the payment amount into smaller increments in an attempt to get what they can from you, provided you have given consent to do so when taking the loan. Every time they make these attempts, your bank could charge your account an insufficient fund fee if there are insufficient funds for these attempts.
Along with these actions, the lender’s legal department may send you letters. The company may also try to contact your friends and relatives about the best way to reach you. If your account does go to collections, Federal law prevents them from sharing their identity or telling others about your debt situation – but collections agencies don’t always abide by these rules.
A Report on Payday Loan Lender Practices
In 2014, the Consumer Financial Protection Bureau, or CFPB, published a report on the lending practices of the payday lending industry. The bureau discovered that payday collectors went to borrowers’ homes and places of employment. These lenders even told family, friends and coworkers details about unpaid loans.
John Ulzheimer, a credit expert, commented on the report. He said, “They’re aggressive because you’re already on a fairly short leash. Payday lenders understand that if someone goes delinquent, it’s much more likely that they’re going to default.”
A Time publication confirms that when payday loan borrowers default, approximately two-thirds of them eventually pay the loan balance in full. This same publication notes that about 40 percent of loan defaults wind up in a charge-off status, meaning that these loans were past due by at least 60 days and the lender submitted them as a write-off. According to researchers, even if loans are written off, borrowers may still be forced to deal with aggressive debt collection tactics.
Threats that come with Delinquent Bad Credit Payday Loans
When it comes to past due bad credit payday loans, it’s common for lenders to threaten borrowers with scary, but untrue, consequences. A Pew Charitable Trusts survey confirms that 30 percent of online short-term loan borrowers report that payday lenders have threatened them when their payment is delinquent. The survey states that borrowers have even been threatened with arrest.
If you fail to pay back a loan, it is not considered a criminal offense. In fact, when lenders threaten you with legal action, they are not following the law. Despite this, some lenders have found ways to use bad-check regulations to file criminal complaints against past due borrowers.
Act in Good Faith and Attempt to Settle Past Due Accounts
Lenders would prefer to collect the amount that you owe from you instead of turning to an outside collections agency to retrieve the funds. Ulzheimer said, “It’s not inconceivable that third-party debt collectors are charging $0.3, $0.4 or $0.5 cents on the dollar. That makes it a lender’s first priority to collect the debt themselves. The second option is to see if they can settle with you directly for some amount of money. The third is outsourcing to a debt collector.” He went on to say, “That’s when the fun begins because these guys are professional debt collectors.”
The lenders of bad credit payday loans are able to transfer the amount that people borrow to professional debt collectors quickly. In some cases, the transfer happens in as little as 30 days. When this occurs, efforts to reclaim the money intensify. For instance, you may receive several calls a day and the threats to sue may become aggressive. If your loan is sent to a collections agency, then your credit score is at a greater risk. Both payday lenders and collection agencies may report your delinquency to the credit bureaus.
If a Collections Agency Sues You
If it seems like your loan amount is too small for a collections agency to bother worrying about, you should reconsider this line of thinking. The founder of the Consumer Recovery Network, Michael Bovee, said, “Nearly all lawsuits against consumers today are for relatively small amounts. I’ve seen lawsuits for under $500. Even Capital One sues for less than $500 these days.”
Loan Defaults are Never a Good Thing
Regardless of the type of loan, it’s never a good idea to default on your payment responsibilities. In fact, when you allow an account to become past due, very bad things can happen. This situation impacts your credit rating and turns you into a borrowing risk for other lenders. It can also cost you more in the long run. Do what you can to stay current on your loans. To learn more about the consequences of being past due on a payday loan, head to the Personal Money Store.