When you’re in a tough financial situation and need cash quickly, a payday loan can be a great short-term solution. This is especially helpful when you have a steady income, don’t have great credit, and can pay the amount back in full with your next paycheck.
But what happens if you’re hit with more financial hardships and need to use your next paycheck on something else? Below, we discuss what happens when you can’t pay back a payday loan.
You Default on Your Payday Loan
When you can’t pay back your loan, this is called “defaulting.” With other loans, this happens when you miss multiple payments in a row. But since you’re expected to pay back the full amount with your next paycheck, you technically default with just one “missed” payment.
What to Expect
If you let your loan payment date come and go, several things will happen, and none of them will be good.
First of all, if agreed to beforehand, the lenders will withdraw the expected amount from your bank account; this means you can go into the red and get overdraft fees on top of that. If this isn’t possible, then they’ll break down the payments into smaller amounts so they can get as much possible from your balance.
You may also get communications from your lenders, such as emails and letter. They can even go so far as to contact your friends, family, and any references you provided them at the time of application.
What to Do
If you already know you can’t make your repayment date, talk to your lender before the last possible day. Ask them for an extension, which will entail signing an amendment to your original loan agreement. Usually, this involves a higher interest rate, but you’ll get an extension of a few weeks.
If you have a good enough credit score, consider taking out a personal loan to pay off your payday loan. Taking out a new loan to settle debt from another sounds like a bad idea, but if you handle a personal loan responsibly, it can be quite useful.
Personal loans have longer repayment periods and they usually have lower interest rates too. This means you’ll have longer to get funds together and you won’t be paying as much interest.
You’ll want to consider credit counseling so you can avoid situations like this in the future.
Pay Your Payday Loan Back in Full as Soon as Possible
As with all loans, the best course of action is to pay it back as soon as you can. A payday loan is no exception.
Should you find yourself in a financial situation where you can’t complete repayment, at least you now know what happens if you can’t. That way, you can be prepared for what’s to come.
If you need more help about loans, then check out our resources page.
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