What Happens When You Can’t Pay Back a Payday Loan?

Inside Subprime: Jan 27, 2019

By Lindsay Frankel

Sometimes payday doesn’t line up with the date bills are due, or you face unexpected costs like healthcare emergencies and auto repairs. When you need a little extra cash to get by, a payday loan may seem like an appealing choice, since these small-dollar loans don’t require a credit check. But more than 40 percent of borrowers don’t understand the true cost of these risky loans, which have annualized interest rates of almost 400 percent. Though payday loans are typically intended to be paid back within 2 weeks, the payday lending business model relies on repeat borrowers, and four out of five payday loans are renewed are rolled over, according to the Consumer Financial Protection Bureau.

Interest and fees pile on when payday loans are renewed, trapping borrowers in a cycle of debt that can be difficult to overcome. But if you have more debt than you can manage, you’re not alone, and there are some strategies that will alleviate financial stress.

Start with high-interest debts

Look at the big picture of all your debts, and make sure you are paying off debt with the highest interest rates first. This will reduce the total amount of interest you end up paying. Most likely, you’ll want to tackle any outstanding payday loans before you attempt to pay off other debts.

Ask for help

If your debt has gotten out of control, it’s a good idea to ask for financial assistance. Explain your situation to friends and family members, and demonstrate a plan to pay back the amount you need to borrow. You can also ask a friend or family member with a higher credit score to cosign on a lower-interest loan to help you consolidate your debt. Just keep in mind that defaulting on the loan will impact your cosigner as well, so ensure you have sufficient income to handle the payments. You can also make an appointment with a counselor at the National Federation for Credit Counseling if you need advice on how to manage your debt.

Ask for an extended payment plan

If you’ve borrowed from a lender that is a member of the Community Financial Services Association of America, it’s likely the lender will grant your request for an extension, so long as you ask before the day payment is due. Make sure you understand the terms of the amendment to your loan agreement before signing. Some states require lenders to provide this option, so check with your state attorney general’s office, or see our state financial resource guides.

Consolidate with a personal loan or installment loan

Even if the previous options fail, avoid taking out a new payday loan, which will only exacerbate your financial situation. Instead, consider a personal loan from a bank or a payday alternative loan from a credit union. Getting a loan with a lower interest rate will cut the total cost of your debt. If you have bad credit and don’t qualify for these options, you may want to apply for an installment loan. These loans have longer terms and lower interest rates than payday loans, which makes them easier to manage. A credit check isn’t required, but these loans will help you build credit if you make your payments on time.

While using these strategies, you should also look for opportunities for additional income. This will help you pay off your debt and avoid needing to borrow money in the future.

For more information on payday loans, scams, and cash advances and check out our city and state financial guides including Indiana, Illinois, Ohio, Mississippi, Missouri, and Kansas.