Payday loans are short-term loans targeted toward people with bad credit. A payday loan is called this because the duration of these loans are only until the borrowers next payday, typically two weeks. This differs from a standard loan, which may be borrowed for a year or more. A payday loan also does not require collateral, as do many standard loans. However, it can be easy for a payday loan to go into default if the borrower does not have the money to pay back the loan. When this occurs, there are a few things that can happen.
Collections
When a payday loan is defaulted, the company will turn it over to a collection company. A loan will go into default usually after the first missed payment, although many companies will attempt to work out a payment plan with the borrower first before they turn the account over. They may also offer the choice of extending the loan until the next pay period.
Considerations
If you have defaulted on a payday loan, you can still settle it with the collection agency. Talk to the company that contacts you to make arrangements to pay on the loan.
Misconceptions
A common theory is that a payday lender cannot sue for their money. However, in most states, the courts may allow a lender to garnish the wages of a borrower who has defaulted on the loan.
Consequences
A payday loan default will affect your credit score negatively. It may also keep you from receiving any other payday loans that you apply for in the future, unless it is paid off.
Prevention/Solution
Talk to a debt consolidation company if your loans are in default if you need help with paying your bills. You may also speak to the payday lender before you default on your loans to try and arrange a payment plan.
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