The Ugly Side of Payday Loans

payday loansAfter you take out a payday loan, there may come a time when robbing Peter to pay Paul just doesn't work anymore. When the “real” bills are stacking up in a Technicolor rainbow of shutoff notices, and you really would like to eat something besides saltines and tuna, the time has come to make a tough choice – make another outrageously high payment on that payday loan, or default. You could ask them to wait to automatically withdraw the funds from your account because you don't have sufficient funds, but that is just delaying the inevitable. Unless your paycheck magically gets bigger next week, something has got to be done about this situation.

Video: A former payday lender explains how payday loans work

How to Default on a Payday Loan

secured loanIn most cases the lender has a direct link to your bank account for automatic withdrawals. In that case, defaulting on your loan is as simple as changing your bank account or switching to another bank. They will start calling and sending notices, and perhaps making some pretty outrageous threats, but outside of that, nothing will really happen for a few months. The same is true if you had to pay any other way and simply stopped sending the checks. Eventually the maximum number of rollovers will be reached and your effective annual interest rate will drop, but not before your debt has at least tripled. If attempts to collect are unsuccessful, the lender will write-off the debt and send it to a collection agency .

Legal Course of Action for the Lender

judgementLike any other unsecured loan, payday lenders don't have many options for collecting on your debt. They can harass you until they are blue in the face, but you can stop that by sending a cease and desist letter to the collection agency. Some states require payday lenders to accept payment plans. Otherwise, all they can do is sue – but they make some pretty far-fetched threats because they really don't want to sue. It's rare for any creditor to sue, much less a payday lender. However, if they do sue, the most common side effects are wage garnishments, property liens, and account levies. If they don't sue, you will lose a good chunk of points from the company writing off the debt and bad payment history, but if they do, it won't be too much worse since a write-off and late payments are the worst things you can do to your credit.

Alternatives to Defaulting

Video: Payday Loans are one of the worst possible ways to borrow

If you don't want to take the hit to your credit and sanity, a debt consolidation loan will help. It will stop the payday loan from doubling or tripling in size and give you a low interest rate to repay the debt. You won't lose points for missed payments or a debt write-off, and in fact, it may help your credit improve. Instead of trying to keep up with the breakneck upward spiral of debt from a payday loan, a debt consolidation loan will allow you to pay the debt at your own pace, and pay the bills too.

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