Have you ever found yourself in a situation where you urgently need money, but you can’t seem to find anyone to borrow from?
Many times, emergency situations force people to take short-term loans to respond to their needs immediately. No doubt, short-term loans can appear to be the only life-saving option for most people in a stiff financial situation.
How safe are these short-term loans?
Well, these short-term loans appear to be the quickest response to emergency financial situations, but they can quickly lock borrowers in a debt circle.
Short-term loans usually have high-interest rates. In many cases, borrowers end up taking more loans while trying to pay back the previous loans that they had taken earlier. Borrowers with long-term debt problems will have a much harder time paying it off on the original due date.
When we talk about short-term loans, the most common options are payday loans and cash advances. Before we go ahead to talk about how these short-term loans can become bad when left unpaid, let us understand how these loan option functions.
What Happens If I Stop Paying My Payday Loan?
Before we go ahead to look at the likely actions that would be taken against you when you leave your payday loan unpaid, let us quickly run you through what a payday loan is and how it works.
What is a payday loan?
A payday is basically a small amount of unsecured cash loan (usually not more than $1500) with a short tenure (loan term ranges from a few weeks up to one month).
A borrower may receive this loan against a post-dated personal cheque or directly to the borrower’s account. after receiving the quick cash of about $1000 (depending on the amount borrowed), the borrower is expected to pay back the loan and other charges/fees on the next payday.
That means the borrower will be paying back the principal + financial fees on the next payday. Payday lenders provide money to borrowers with very high-interest rates compared to other traditional loans.
Many people opt for payday loans because it is easy to get and does not require documentation processes, and credit score approval. Most payday loan borrowers are people with bad credit.
How do Payday loans work?
The process of getting a payday is quite simple. If you are faced with an emergency situation and in need of cash fast, you can walk up to a payday lender store or visit an online payday lender. Once you find the payday lender that you wish to work with, then you can go on to:
a. Provide the lender with your paycheck.
b. Provide the lender with your bank details for verification.
After providing the payday lender with the following information, the payday lender will then:
a. Give you the cash.
b. The lender will also inform you about when next you need to return the money. You may be able to return the money via cash by visiting the lender’s store or by making payments online.
Many people prefer to borrow money from payday lenders because payday lenders often avoid credit checking. Payday lenders do not require a minimum limit of income before giving cash to their borrowers. Whether or not your credit score is low, a payday lender will still borrow your money.
Lenders only require a valid paycheck and a checking account for instant approval and payment. Do you know that getting a payday loan has become easier and faster these days?
All you need to do is to submit your loan application and the lender will transfer the money to your bank account. Then you pay back the money (principal+fees) on your next payday.
Note: If you must take a payday loan, make sure you are borrowing from a trusted lender. some lenders practice illegal payday lending.
The Impact of payday loans on your credit score
A payday loan usually does not reflect on your credit report of TransUnion, Experian, Equifax, and the major credit bureaus. However, in some cases, your payday loan records might be collected by special credit reporting agencies. In that case, a late or an unpaid payday loan might stay on your credit file for a period of 7 years.
So, if there is a chance of missing a loan repayment, to be on the safer side, you should always inform your lender first and see if anyway you can arrange an easier or more flexible repayment option.
The lenders might consider this situation while approving your future loan application. So, this is how payday loans can affect your credit score. If you fail to repay a payday loan, it is quite possible that the lender (legal) may send your file into collections. If that happens, the debt collector might report your unpaid payday loan debt to the main credit reporting agencies. Hence, your credit score gets affected by your unpaid payday loans. If you repay your payday loans on time, you might avoid such a dire situation.
What Happens If You Default On A Payday Loan?
Like most people, getting a payday loan may be the only option when you need fast cash and payday is still a few weeks away. Getting a payday loan may be your best option if you don’t have a credit card or have a bad credit score.
A payday loan is a short-term high-interest loan. When you take a payday loan, you usually have a short period to pay back the loan (usually around 14 days) to pay back the money.
The interest rates for payday loans are usually high because of the short period. The interest rate is also known as (APR). The average APR for payday loans is about 300%, but some lenders charge about 500% or even more.
Since the interest rates are high, many payday loan borrowers are unable to pay back their loan and the only choice is to “roll over” their loan.
“Rolling over” means paying a fee to extend the repayment period. This could lead to a debt cycle where the original amount is topped off by fees and interest and you could eventually find yourself unable to pay back the money you owe.
Not paying your loan can quickly lead to a loan default.
What happens when you default on your loan?
a. You will be charged additional fees
When you default on a loan, you will be charged additional fees. Asides from the additional fees, if the lender has your check they can repeatedly cash it which can lead to bank overdraft fees if your account is empty.
At this point, it just adds up to your debts.
b. Your debt may be turned over to a debt collections agency
Usually, the payday lender will attempt to collect the money from you for 60 days. If you cannot pay back after this period, they can turn over your debts to a loan collections agency.
Once you are turned over to a debt collections agency, the debt collector will give you calls and send you messages to make you pay back your debts. If the debt collector is not able to recover the money from you, then they could take you to court to recover the payments.
When it comes to knowing what happens when your payday loan is left unpaid, many borrowers have asked different questions. In this section, we will be answering some of these questions.
Can online payday loans take me to court?
Surprisingly YES, the fact that you were able to get a payday loan easily does not mean that a lender will go easy on you when you default on your payments.
A payday lender (online or traditional) can take you to court If you default on your loan, they can file a debt collection lawsuit to get a judgment from the courts to legally force you to pay the money.
Having a small amount of debt may not make a difference. Payday lenders often use the small-claims court system to recover money from their borrowers who defaulted on their payday loans.
When a debt collection lawsuit is opened against you, you will receive a court summons indicating what the complaint is all about. When you receive the summons, you have to respond.
Note: Payday loan lender has to win a judgment before they can take action.
Can I Go To Jail For An Unpaid Payday Loan? Can I Get Arrested?
Well, you cannot go to jail for not paying your payday loan regardless of the type of debt. According to the Consumer Financial Protection Bureau, you cannot get arrested for not paying a payday loan. Not paying a payday loan is not a crime.
If this is true, how come many borrowers get confused when they receive a warrant of arrest. So what exactly went wrong?
Alright, just like we said earlier, payday lenders may use small claims court to sue default borrowers. If on the other hand, you failed to respond to the summon, then the lender may get a warrant of arrest on this basis.
Most times when borrowers fail to appear in court, then the lender can arrest the borrower on that basis and not because the borrower is owing. So yes you can spend a few hours or days in jail when you ignore the court order.
What can I do when a debt collector threatens to have me arrested?
If you left your payday loan unpaid due to low cash or no money at all, then you may be scared of getting arrested. If your lender has reported you to a debt collector, then you may be worried about the debt collector’s action.
If you are receiving endless threats from a loan collector, you can take the following steps to reduce it or put an end to it. a debt collector has no right to abuse you, show up in your house at any time, or tell other people about your loan agreement.
Steps to take:
a. If you are receiving continuous threats or abuse from a debt collector, you can file a report with your state’s Attorney General.
b. Check if a complaint was filed against you
No matter how many threats you get from a debt collector, the only thing that can make you end up in jail is if you ignore the court summons. if a complaint is made against you, you would be summoned, you can check with your local clerk to check a complaint was filed against you.
c. Don’t Ignore court summons
If you receive a summons from the court, don’t ignore it because that is the easiest way for a creditor to get a warrant of arrest.
d.When appearing in court, make sure you appear before the court
In a small-claims court, you are not required to have a lawyer and because of this, many debtors who are not used to the system don’t know what to do. There are instances when debtors become confused and end up being marked absent from court even if they were present.
Cash Advance Loans Online Become bad When Left Unpaid
Just like payday loans, cash advance loans online can become bad when left unpaid. A cash advance is also a short-term loan like a payday loan. Cash advance loans online are a little bit different from payday loans because the fees are lower compared to what you have compared to payday loans.
Cash advance fees are anywhere between 2-5%. On bigger cash advances, this can become quite a significant cost. However, paying that small fee for a small emergency doesn’t feel overly problematic. This isn’t the only fee that you’ll encounter, though. APRs are far smaller, but they’re still significant.
The truth is that making early payments is best for both payday loans and cash advances.
How cash advance loans online can become bad when left unpaid
Although using cash advance loans online helps you avoid credit checks to determine rates. High-risk loans equate to larger interest rates. The good side to these loans is that their short terms keep the debt off your credit report altogether. The only way your debt is reported is if you default with the direct lender and the loan is then sold to a collections agency. The debt will be reported by the agency themselves.
although payday loans and cash advances can be handy in emergency situations, they can also have a negative effect on your finances. Online personal loans are a great alternative to payday/cash advance loans.