What Happens If You Can't Repay a Payday Loan?

Payday lenders are heavily regulated, but have collection processes available to them.
Image Credit: Dan Kitwood/Getty Images News/Getty Images

Despite astronomical interest rates and a reputation for less-than-desirable practices, payday loans remain an option for many borrowers without easy access to other forms of credit. Unfortunately, low-income borrowers often find themselves unable to repay payday loans on schedule. Though payday loan laws vary significantly from state to state, all lenders have several collection methods available.

Electronic Drafts

Many payday lenders collect repayment on their loans by automatically drafting funds from the borrower's bank account. During the lending process, the borrower must supply the dates of upcoming deposits from employers. Lenders then schedule an automatic draft for early that same day, often around 5:00 a.m. local time, to recover payments. If the draft fails, or if enough funds are not available to cover the payment, the lender may attempt to draft from the account several more times. In addition, the lender may attempt to draft from any other accounts the borrower listed when obtaining the loan.

Telephone Calls

If a payday lender is unable to recover payment by automatic drafts, representatives may begin placing collection calls to the borrower's home, mobile and work phone numbers. Aggressive lenders may make several calls per day, often with the effect of annoying the borrower into making payment. In some cases, lenders may also attempt to reach the borrower's family, friends and coworkers, though state and local laws typically prohibit such practices unless the borrower listed these individuals during the lending process.

Credit Reporting

Once the payday loan becomes at least 30 days past due, the lender will report the delinquency to credit reporting bureaus. Borrowers who have such a delinquency on their credit report may have a much more difficult time obtaining similar loans, as well as other types of credit, for as long as seven years after the missed payment.

Collection Agencies

If a payday lender still cannot recover payment after a period of times, typically two months, it may engage the services of a collections agency. Collection agencies typically renew collection efforts already used by the lender, including frequent telephone calls and direct mail. Lenders also notify credit reporting bureaus when they write off a loan by sending it to a collections agency, as a written-off loan can damage credit ratings even more than a late payment.

Legal Action

If the amount of a payday loan is very high, the lender may sue to recover payment. If the lawsuit is successful, the court may order the borrower's wages garnished until the loan and court costs have been repaid.

Borrower Resources

Though payday lenders may legally use very aggressive collection tactics, borrowers have a number of resources available for relief from these efforts. Financial regulations specify that lenders must provide a way for borrowers to stop lenders from automatically drafting payments. The specific process for stopping these payments is available in the original loan documents, but the process often is as simple as providing written notice to the lender. Similarly, borrowers can stop frequent telephone calls by providing a written cease and desist request to the lender; such a request must specify all numbers at which the borrower no longer wishes to receive calls.

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