What Happens if You Default on a Payday Loan?
Payday loans have become a necessity for a lot of households in recent years. With the coronavirus pandemic decimating the national economy and negatively impacting millions of Canadians, payday loans might be more important than ever before. Although the industry has been given a black eye by the mainstream press, the financial product can be of tremendous help during rough times.
Millions of people use payday loans as a financial lifeline. The automobile has broken down, the refrigerator has stopped working, your child needs dental work – many different circumstances arise that require the need to seek out a payday loan. While the interest can be quite high, this financial instrument can rescue you from these unexpected and costly expenses. Not everyone has a rainy-day fund, especially in this economy, so a payday loan is a great option to have.
Over the years, studies have typically revealed that many households are one missed paycheque away from financial ruin. So, when an emergency occurs, it can be challenging to pay for these unexpected costs – a broken-down washer and dryer, a set of new tires, or an illness in the family.
But what happens if you default on a payday loan?? Here are seven things that could happen if you default on a payday loan:
1. A Barrage of Collection Calls
Those who borrow money are often worried about what happens if they default on a payday loan. Once you miss your repayment date, the payday loan company will contact you and inquire about when you will repay the funds. After a while, if you refuse to pay back the money, the payday loan establishment will submit your file to a third-party debt collection firm.
This is when the barrage of collection calls and letters takes place. You will receive plenty of telephone calls until you work out an arrangement whereby you agree to repay the funds.
2. Immediate Automatic Bank Withdrawals
Many payday loan businesses will require that you provide your bank account information and/or offer post-dated cheques. Indeed, there is no exact time when it will happen, but the payday loan store will execute immediate and automatic withdrawals from your bank account.
This can be a dangerous thing for your finances, particularly if you do not have the funds in your chequing account. Why? Three reasons. The first is that you could be hit with enormous overdraft fees. The second is that if you do not have an overdraft, you could be slapped with a bounced payment. The third is that if all the remaining money in your account is gone and you have nothing left over.
3. Criminal Complaints
It would help if you did not worry that you will go to imprison for failing to repay a payday loan. However, a small number of payday loan establishments will threaten to make a criminal complaint by using bad-cheque laws against borrowers. The Ontario government has recommended consumers to contact the relevant authorities if a payday loan provider threatens criminal action.
4. Court Summons
Many payday loan stores are filing lawsuits against customers, even if it is for a small amount from the microloan. Most lenders who use the courts typically win because consumers refuse to show up in court, forcing the judge to submit a summary judgment. This allows the court to collect money on behalf of the collection agency.
5. Renegotiate the Terms
Like most lenders, payday loan businesses prefer some payment than nothing at all. Therefore, contrary to popular opinion, payday lenders are willing to work with you to find some way of getting you to repay the principal. So, when you cannot complete repayment, you can always renegotiate the terms.
Here are some of the options that payday lenders will provide:
- Establish a payment plan that works around your abilities.
- Suspend interest on the principal.
- Extend the repayment schedule to a time that satisfies both parties.
6. Your Credit Report Takes a Hit
For the most part, payday loan facilities do not conduct credit checks on borrowers. Your credit report is generally safe during the application process. Unfortunately, once the lender transfers the debt to a collection agency, the loan will be added to your credit report, and your score will take a hit.
Moreover, as The Balance notes:
“Any negative checking account balance also may be turned over to a separate collection agency, leading to two separate collection accounts stemming from a single payday loan default.”
7. Seek Advice from a Credit Counselor
A payday loan might be the beginning of a downward spiral. Industry studies have found that microloans are typically used as one-offs to cover an unforeseen event. However, there are many cases of individuals being stuck in the payday loan loop, which negatively affects your finances. If you have failed to repay your payday loan, you may need to get in touch with a credit counselor and explore your options.