Payday loans are loans issued by lenders for a short period of time --- typically a few days to a month --- at very high rates of interest. If a borrower of a payday loan defaults, he's typically charged additional fees and may face an even higher rate of interest on the loan. In addition, the lender is legally entitled to seek payment of the loan through a number of methods.
Penalties
The contract that a borrower signs before taking out a payday loan spells out the consequences of defaulting on a payday loan. While each lender's contract is slightly different, the borrower is usually assessed additional fees, which are then added to the premium of the loan. In addition, the borrower is required to pay a higher rate of interest on this premium. A short time after defaulting, a borrower may find that he owes an amount several times the size of his initial loan.
Collection Actions
A lender may take a number of different measures to compel the borrower to repay the loan. Initially, the lender is likely to contact the borrower, either by phone or by letter. If the borrower continues to remain delinquent on the loan, the creditor may then sue the borrower. If it receives a judgment in court, the creditor may then choose to petition the judge to freeze the borrower's bank account or to garnish his wages.
Financial Considerations
Although a creditor is legally allowed to take action against a debtor in court, whether it chooses to do so is another question. Often, the cost of suing a borrower exceeds the cost of the loan itself. In this case, the creditor may find that it makes more financial sense to negotiate a payment plan with the borrower, accept partial payment or, in some cases, write off the debt entirely.
Effects
Whether a creditor seeks payment of a debt or not, it almost certainly reports the delinquent debt to a credit reporting agency. This means that the delinquent debt is noted on the debtor's credit report, harming his credit score. According to U.S. federal law, negative information regarding bad debts can remain on a person's credit report for a maximum of seven years, during which time it continues to drag down the person's score and potentially affect the interest rate he can receive on loans.
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