Payday loans are high interest, short term loans that enable individuals to fund expenses before they receive their next paycheck. However, they come with heavy financial and credit consequences if you fail to make timely loan payments. They are often considered nightmarish for this reason, though many individuals with poor credit feel forced into taking out payday loans.
In this guide, we will go over what you need to know about loan late fees, the pros and cons of payday loans, and payday loan alternatives that might benefit you more.
Loan late fees
Most payday loans have extremely short repayment terms. Lenders expect the loan to be repaid once you have received your next paycheck. If you fail to repay the payday loan, miss a payment, or miss multiple payments, you will be charged late fees.
Late fees are meant to discourage borrowers from making late payments. They may also cover the risks that payday lenders take on for lending out money on short notice to those with poor or unestablished credit.
Payday loan late fees vary depending on your lender, and in some states lenders charge returned check fees instead. The late fee is either a flat rate for each missed payment or is calculated as a percentage of your outstanding balance. This percentage can increase for each month you fail to pay down the loan installment.
While many states have laws that cap the maximum amount payday loan fees can cost, payday loans can still be extremely expensive between upfront charges, high interest, and late fees. The average annual percentage rate (APR) of a payday loan is a whopping 400%, whereas most loans cap out at 36%.
The connection between loan late fees and payday loans
Loan late fees are more critical to payday loans than most other types of personal loans. The short-term nature of payday loans results in exacerbated consequences if you miss the loan payment.
Payday loans usually have two- to four-week repayment periods. This is very short when compared to personal loans, which may have loan tenures of many years. You can find your designated payday loan due dates outlined in your loan agreement.
Consequences of loan late payments
Extra bank fees
Many payday lenders require you to grant them withdrawal access to your bank account according to the loan agreement’s terms and conditions. When your loan installment is due, lenders will directly try to withdraw that amount from your bank account.
If you don’t have enough money in your account, lenders will be unable to take out the loan amount and interest from it. However, they will likely continue to try and withdraw as much money as they can from your bank account. Your bank may charge you fees for each attempt, such as overdraft fees.
The lender’s series of withdrawal attempts can drain your funds until you have nearly nothing left in your account. It can also prevent your other transactions from going through, resulting in additional charges and penalties. Depending on the number of attempts, you can get seriously overcharged just for missing a single payday loan debt payment.
Loan sent to collections
If you miss a payday loan payment, it’s possible that your lender sends your loan to collections. This means that it is given to a collection agency or their in-house collections department.
Collection calls may involve frequent phone calls, letters from lawyers, messages on social media and text, and more. The lender may even threaten to take you to court.
It is important to note that if the lender threatens jail time or arrest, this is illegal for them to do. Threatening arrest for missing loan payments can be reported to your state attorney general’s office.
You can get sued
Collectors and lenders may sue payday loan borrowers for failing to pay back the loan or missing payments for a long period of time. If you are sued, you will need to show up to court.
In most of the lawsuits against borrowers for nonpayment, the lender wins because the borrowers fail to show up in court. The default judgment for this kind of lawsuit is in favor of the lenders, so it is critical to appear in court if you are called.
Here are the potential consequences of getting sued:
- Property liens
- Wage garnishment
- Money collected directly from your bank accounts
Damaged credit score and creditworthiness
Your credit score shows your creditworthiness, which is your level of responsible debt and financial management. If you have a high credit score, it becomes much easier to qualify for credit, personal loans, and more.
Missing payday loan payments can seriously hurt your credit score, especially since the repayment terms are relatively strict.
Additional interest and penalties on the outstanding balance
In addition to the late fee you will be charged, you might accumulate more interest and incur additional penalties based on the outstanding balance.
You can fall into a debt cycle
Payday loans are notorious in that borrowers can relatively easily spiral into a debt cycle. You may end up needing to extend the payday loan and pay extra so that it doesn’t default, or you might need to refinance the payday loan so that you can essentially reset the debt.
As long as your payday loan debt continues to have an outstanding balance, it will accrue heavy interest and result in additional fees and penalties that are hard to deal with.
Understanding loan late payment consequences
The severity of loan late payment consequences cannot be understated. If you plan on taking out a payday loan or have already obtained one, it is vital that you are well-informed of the potential risks and consequences.
Rollovers and extensions
A payday loan rollover essentially renews your payday loan. If you miss a payment, you may end up needing to pay an extra fee in order to delay loan repayment or extend your loan repayment schedule. This leads to an even higher cost of borrowing.
Managing loan late payments
Here are various strategies that could help you avoid or mitigate the negative consequences associated with late payday loan payments.
Save up enough in your bank account for withdrawal
Payday lenders might continuously attempt to withdraw money from your bank account even if there is insufficient money. This can lead to extra bank fees and disrupted transactions. Before your repayment due date arrives, make sure that you have enough money in your account.
In the month or two weeks you have the active debt burden of the payday loan, try to minimize your expenses as much as possible. Other than necessities such as food, rent/mortgage, other debt, and utilities, it is advisable to cut back on other unnecessary expenses.
Negotiate for better terms
If you feel that you are currently stuck with repaying debt, consider entering negotiations with your lender. In some cases, payday loan borrowers can find leverage in mentioning that they are considering declaring bankruptcy–in which case the lender would see no money at all. This may lead to the lender agreeing to be more lenient with the repayment terms so you can try to pay back the debt.
Responsible borrowing and communication
Implementing responsible borrowing and credit management practices can help you avoid penalties and enjoy improved financial stability. The benefits of best practices can save you significant money and stress.
Clear communication skills can also empower you to face payment challenges, especially in the case of payday loans. If you suspect that you are unable to make a payday loan installment this month, it might be a good idea to communicate this to your lender. Some lenders will be willing to compromise and find a suitable solution for repayment that makes it simpler for you to manage debt and them to received their owed money.
Legal regulations and consumer rights
Lenders cannot garnish your wages without a court order
There are various restrictions surrounding wage and bank account garnishment. Lenders need to obtain a garnishment order before they can collect outstanding balances that you owe them through wage garnishment.
To obtain a garnishment order, the payday lender (or collection agency) needs to sue you and take you to court.
Lenders can’t arrest you for nonpayment
Predatory payday lenders may threaten you with an arrest. However, you cannot be arrested for not paying back your payday loan–it is not a criminal case. You may be sued and sustain other financial consequences, but they cannot arrest you for failing to pay back the loan.
Important: You should still show up in court if the payday lender files a claim against you and takes you to court! Otherwise, missing a court appearance does make it possible for you to be arrested for no-showing in court (also known as a bench warrant).
You have the right to report broken laws and regulations
If you are withstanding unfair and predatory practices or suspect broken regulations, make sure you contact your state attorney general’s office and alert them of this illegal lender behavior. You can also report illegal practices to your state regulator or submit a complaint online with the Consumer Financial Protection Bureau (CFPB).
It can help your claim if you collect and organize any threats the lender has made against you, such as by email or by phone.
An attorney can also help you protect your interests and inform you of your rights. If you are sued by your lender, it is advisable to procure the services of an attorney who is familiar with payday loans.
Lenders can’t charge those on active duty an interest rate over 36%
The Military Lending Act (MLA) says that those who are active-duty service members (as well as their covered dependents) can’t be charged over 36% in interest. These members also gain other rights under this act, such as lenders being prohibited from imposing any prepayment penalties on you.
If you are on active duty, you may have additional rights that can protect you in case you need to take out a payday loan.
Financial education and long-term solutions
While payday loans are generally considered a last resort type of loan, they still can help you if you are in urgent need of fast funds before your next paycheck and have poor credit. In order to enhance your financial stability in the long run, it is a good idea to pursue financial literacy and education that can empower you to effectively manage debt and money.
Build a healthy emergency fund
One good strategy to improve your overall financial stability and prevent the need for payday loans in the future is to build up a sufficient emergency fund.
Ideally, an emergency fund should:
- Cover three to six months’ worth of living expenses
- Be established in a separate savings account
- Not be dipped into unless it is a real emergency
- Be replenished after it is depleted
By building up an adequate emergency savings fund, you can face unforeseen financial challenges with more ease. In case of unexpected expenses, you will not be forced to take out a payday loan to make ends meet.
Explore other credit options
Credit cards are a popular alternative for payday loans. If you have a credit card account with credit to spare, you might want to use as much of this credit as you can afford before you consider seeking out a payday loan.
While credit card interest rates and fees are also fairly high, they still tend to be preferable to the terms and consequences of payday loans.
Choose a personal loan instead
Personal loans don’t usually come with such short-term borrowing requirements and conditions. If you need fast funds, many lenders also offer you the option to expedite the funding process by paying an extra fee. Since personal loan tenures are typically longer than those of payday loans, you get significantly more breathing room when it comes to managing the debt burden and repaying the loan.
Payday loans have extremely high fees and interest rates, as well as costly payment consequences if you can’t make the two- to four-week repayment schedule. They can be a tolerable last resort for borrowers who need to fund their living expenses before their next paycheck, especially for those who have poor credit.
Before you sign a payday loan agreement, make sure that you are fully aware of the potential risks and consequences of late payments. If you worry you may not have enough money to pay the installment, consider alternatives, such as using a credit card instead.
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