A payday loan is a loan issued for short time, usually several days to a month, that carries a very high rate of interest -- up to 391 percent, according to the Federal Trade Commission. In addition to interest payments, many payday lenders also charge various fees to borrowers, particularly for defaults on payments. There are a number of things that you can do to avoid defaulting on a payday loan.
Issuing Loans
When a lender issues a payday loan, it will generally require that you provide it with some form of payment in advance. This will generally include a postdated check, credit or debit card number, or a number to a checking or savings account that the creditor can use to take out money when the loan comes due. If not enough money is not in the account when the lender makes the withdrawal, you go into default.
Default
If you are unable to pay back the loan, you have several options. The simplest option is to simple allow the loan to go into default. When a loan is not paid back, the loan will roll over into another payment period, meaning it will accrue additional interest. You will also likely be charged a number of fees and may face a higher rate of interest than you were required to pay on the original loan.
Partial Payment
To avoid default, you can also consider making partial payment on the loan. Many lenders allow you to pay only a portion of the loan, similar to the "minimum balance" that a person is allowed to pay on a credit card. Making this payment will allow you to avoid being charged penalty fees for late payment. However, the loan will still roll over into the next payment period and you will be required to pay more interest.
Alternatives to Payday Loans
According to the Federal Trade Commission, there are a number of alternatives to payday loans, most of which can be used to pay down the payday loan. These include taking out a line of credit with a credit card company, taking out a loan from a credit union, or borrowing money from a finance company. While you will still owe money, the rates of interest charged on these loans will be significantly less than that owed on the payday loan.
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