You got laid off but still need to make rent. You’re short on your car payment and need a little extra help. Your electricity was shut off and you need to find a way to pay your overdue bill to turn it back on.
Sometimes, you need a little cash to get by. So you get a payday loan and make good on your bills. But what happens when you can’t repay a payday loan? Here’s what to do if you get caught in this borrowing pickle.
What is a payday loan?
A payday loan is a short-term loan that’s taken out for a small amount, typically $500 or less. Depending on state laws, you could obtain payday loans in person or online.
You take out a payday loan by writing a postdated check for the full balance, including the fees and interest that will add up by the time the loan is due. You could also authorize the lender to automatically debit the full balance from your bank account on the due date.
Payday lenders can charge hefty fees in exchange for the money you borrow. Mike Sullivan, a personal finance consultant for credit counseling agency Take Charge America, said APRs are roughly 400%. It can be difficult to stay current on your bills and your loan with such high interest.
“A $200 loan for 14 days might require a payment of $235, or $35 [in] interest,” Sullivan said. “Borrowers typically focus on the payment amount and don’t consider the total cost.”
What happens when you can’t repay a payday loan?
Americans spend $30 billion a year to borrow from payday and other small-dollar lenders, according to The Pew Charitable Trusts. So if you’ve taken out a payday loan and are having trouble paying it back, you’re not alone. Payday loans disproportionately affect underserved communities, where individuals might not have the resources to use traditional financial institutions, such as banks and credit unions.
“Payday loans are usually taken out by people with very poor credit who cannot find the cash for immediate needs, such as food, gas, or rent,” Sullivan said. “These borrowers do not often have other options for borrowing.”
When you take out a payday loan, many lenders don’t check credit or care about your financial situation. If you don’t have stellar credit, this might sound like a good thing. But it will only put you in deeper financial despair.
“Payday loans are a trap, and there isn’t much a borrower can do once trapped,” Sullivan said. “At some point, these loans often become unbearable, and the borrower defaults.”
Defaulting happens when you can’t pay back your loans on time. This can cause your credit score to plummet, your wages to be garnished, and future loans to have high interest rates. Your loan also could get turned over to a debt collector, who will work to get you to pay back your debt in full. Do your best to avoid defaulting on your payday loans.
What to do if you can’t pay back your payday loan
If you’re struggling to get out of the payday loan cycle, here’s how to pull yourself out.
1. Check your debt
Go over all your debt, from your payday loan to overdue bills. Focus on the ones that have the highest interest rates. With high rates, the longer you take to clear the debt, the more money you’ll end up paying.
2. Extend your repayment plan
Ask your lender for an extended payment plan, which is usually granted if your lender belongs to the Community Financial Services Association of America. You have to ask for an extension before the last day your loan is due, though.
You’ll also sign an amendment to your loan agreement. Read it over and make sure you understand the new terms and interest rates you’re agreeing to. You might be able to get a few extra weeks to repay your loan.
3. Consider a personal loan
Don’t be afraid of big banks, at least not when it comes to personal loans. Payday and personal loans might sound similar, but they’re not the same. Make sure you know the difference between personal and payday loans.
Taking out a personal loan can help you pay off your debt. These loans have much lower interest rates and longer repayment terms than payday loans. If you have poor credit, you’ll be happy to learn that you can even find personal loans for credit scores under 550.
4. Try a credit union
Credit unions and payday loan lenders have a lot in common. You usually can find one near you offering small installment loans that can help you make important payments. Many credit unions have payday alternative loans (PAL) for members.
While you have to be a credit union member for at least a month, you can get anywhere from $200 to $1,000 with terms from one to six months. The interest rate on a PAL is much less than the interest rate on a payday loan, up to 28%.
5. Get help
When you’re in a tough situation, it’s always a good idea to get help, whether it’s credit counseling or a cosigner for a loan. Asking for assistance is a big step in getting on the right track.
You can get help from the National Federation for Credit Counseling. Schedule an appointment with someone who can directly assess your financial situation.
If you’re trying to get a personal loan and your credit score isn’t great, you might want to find a cosigner. A cosigner can be helpful, but remember that the loan will impact both of you. You should both use caution when taking out a loan together.
If you have friends and family who can help you out in a pinch, use their resources. It’s much easier to pay back relatives than a payday loan lender.
Get your freedom back
You might consider a payday loan, but you don’t need it. When you can’t repay a payday loan, there are plenty of alternatives for you to consider. If you’ve already gotten one, take caution and know your rights. Explore ways to pay it back as soon as possible so you’re not trapped in debt.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|