Since a payday loan is not quite as formal as a loan from a bank, many people do not take them as seriously. However, it is important to remember that these loans are just as legally binding as any other sort of financial transaction. Payday loans are a great tool when you run into an emergency and need money fast, but you should never use them for any other reason. Payday loans are only a good option in crises because those who do not pay back a payday loan run the risk of these consequences.
Higher Fees and Interest Rates
The problem with not paying back a payday loan as soon as possible is the high interest rates. Essentially, these types of loans are fairly risky for a lender, so they charge a higher interest rate to compensate them for these risks. This can turn into a major problem for you though if you do not pay the loan back. Each time you have to renew a payday loan or only pay off part of your loan, you end up with more and more interest and fees to pay off. This means that a relatively small loan can end up costing a lot to finally clear up your debt.
Lowered Credit Scores
An online payday loan is a little different from a loan at first because it is not listed on your credit report. As long as you pay it off on time, it will not alter your score at all. However, if you do not pay for the account, the payday loan company will most likely get a third party debt collection agency involved. These companies do report information to credit reporting agencies, so your defaulted loan will start showing up on your score at this point. Over the years, it can cause your scores to go lower and lower which may make it hard to buy a car, get a house, or make any other large purchases in the future. Not paying back a loan can stay on your report for up to seven years, so it can impact your life for quite a while.
Withdrawals From Your Bank Account
Check your payday loan agreement carefully. Some loans may include language that means the company can withdraw funds directly from your bank account if you do not pay them back. Of course this might seem like a pointless thing to worry about if your bank account is empty, but keep in mind that your bank might charge you a fee for bounced transactions. Since payday companies will try different methods to recoup their losses, they may start by trying to withdraw the biggest possible sum from your account and then break it into smaller withdrawals if that does not work. You can end up paying very high bank fees if this happens, or you might end up not being able to pay other bills if your bank account funds disappear at a bad time for you.
Harassment From Collection Agency
Of course a payday loan company will try to get payment from you, but eventually, you may leave them with no choice but to sell your loan to a third party debt collector. This can be a problem because these other companies are notoriously unpleasant to deal with and do not follow the polite rules of online payday loan companies. They may contact your friends and family, call you at odd hours of the day, send you threatening mail, or even visit you in person. These sorts of awkward and unpleasant encounters may continue until you pay back the loan.
It is important to note that you cannot be jailed or subject to criminal proceedings for not paying a debt, but this does not mean you can avoid any legal repercussions at all. Collections agencies can and will sue you even for relatively small amounts. If you choose to fight this in court, you can expect to spend a fair amount of time dealing with the legal complexities. Choosing to just ignore the lawsuit and not show up to court can end up being even more inconvenient for you. Depending on where you live, the court may allow the payday loan company to claim your property or garnish your wages.
Because the repercussions for not paying a loan back can be so severe, it is important to remember to pay your loans on time. A payday loan can be a helpful tool when you are down on your luck a little, but they should only be used during major emergencies because you can run into so much trouble if you become unable or unwilling to pay it.