Payday Loan Default: What Are the Consequences?
If you need money in a small amount, a cash payday loan sounds like a good option. But to know if it is a good idea, you need to first understand what is a payday loan and what are the consequences of potentially not paying it off. Payday advances loans are usually small, and often require no credit check, so they can be a very attractive option. As with any loan, there are consequences if they are not paid back on time so keep in mind that the time period for repaying this loan is usually 14 days. If you default, your credit score can take a significant hit. Let’s now take a better look at how this affects your credit score and see what you can do to reduce your risk.
In case you default on a payday loan, the damage to your credit score can be serious. The lender can also take legal action to collect the debt if the loan obligations are not met. Additionally, lenders may give you a negative rating on your credit report if you have multiple payday loans that are in default. This all will result in you not being able to get a different loan or credit card in the future or cause the interest rates to be much higher than they usually are.
What Does Defaulting on a Loan Mean?
Defaulting on a loan means that you have stopped making payments for it according to the agreed terms. This can lead to drastic consequences for you and could result in the loan being taken over by a collection agency.
Be sure to talk to a credit advisor first, so that you can make a decision that will be in your best interest before you decide to default on the loan.
What Will Happen If You Default on a Payday Loan?
What should worry you when you default on a loan is that the lender will most likely impose a penalty or charge interest on the remaining loan amount. In addition, non-payment can lead to a day in court, overdraft fees, collection calls, and damage to your credit score. It is important to know that all this can happen even if the sum you borrowed is $300. These loans often sound like tempting offers at first but are an easy way to trap you in a cycle of payday debt if you are not careful.
How Does a Payday Loan Default Affect Your Credit?
In terms of where to get a payday loan, you can choose to apply for it in person or opt for payday loans online. We recommend you choose a reputable lender who only lends to those they are sure can be trusted to return everything on time. However, there are many lenders who will intentionally give payday loans for bad credit borrowers so they can trap them in this debt. Be careful not to fall victim to this predatory lending.
Not paying these paycheck loans once you get your salary can have serious consequences for your scores. Your credit report will have all outstanding debts and will affect your ability to get a loan or mortgage in the future. Therefore, if due to some difficulties you do not return your loan on time, you will most likely owe more than what was borrowed.
Now that you’re aware of how all of this can affect your score, pay attention to your payment timeframe and try to make it all on time so that you’ll be ahead of any late fees.
What to Do If You’re Unable to Repay Your Payday Loan?
If you are unable to repay your loan, the lender will report your default to the credit bureaus. In addition, if this is not the first time you have defaulted on your loans, lenders will see you as a high-risk borrower, which will lead to much higher interest rates on future loans. There are steps you can take if you are unable to pay back what you have borrowed. First of all, you can contact the lender to extend the repayment period.
This will give you more time to pay back what you took out and put your financial situation in order. Whether you will be able to get an extension will depend on the state law where you live and the lender’s policy. This kind of program can be free or have some additional fees. In case, by any chance you are not given an extended repayment plan, you can contact and arrange a meeting with a credit counselor or contact a lawyer for legal assistance to consider all your options.
How to Improve Credit After Defaulting on a Payday Loan?
After unpaid debts, you wonder if it is possible and how to improve your score. The answer is yes, it is possible but it takes a lot of time. Your credit records get better after six years. It may sound strange, but even if you do nothing, your credit score will improve a lot after six years. Remember that this period of time is on record and cannot be reduced even if you plan to pay all debts in installments or all at once.
So now you are wondering why you would pay debts on a defaulted loan at all. The reason is that you will then have a better chance that the lender will not drag you to trial at the CCJ. Default is bad, but CCJ is even worse for your credit score, and this can stand for an additional six years. Under no circumstances should you take a second payday loan in order to pay off the first one, because that way you fall into a trap that can lead to a default on both.
Final Thoughts
You may not understand that this type of loan can really negatively affect not only your finances but your scores as well. By not returning what you borrowed, you force the lender to report you to the bureau, and this will surely lead to many loan rejections in the future. If by any chance you find yourself in such a situation, first of all, call, apologize, and explain your circumstances, and the lender may be willing to try and come to an agreement.
Take time to explain that even though you are currently unable to return everything, you are planning to do so in the future. Lenders are not your friends, but they will certainly want their money back, which is why they may agree to extend your repayment period. They may still reject you, so if that happens, we suggest you ask for help from a counselor or financial advisor.
