What Happens If You Cannot Repay a Payday Loan?

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Key takeaways

Failing to repay a payday loan can result in additional fees, debt collection efforts, and potential legal action.
Delinquent payday loans can harm your credit score.
You can negotiate a debt settlement or payment plan with your lender. Or you can roll the loan over for a fee.

Payday loans are helpful in a pinch. You often receive cash on the same day without a credit check or a lengthy application process. The problem is these loans can be challenging to pay back. The consequences can be severe if you can’t repay a payday loan when due.

Consequences of defaulting on a payday loan include additional fees, collection attempts, lawsuits, or wage garnishments.

If you find yourself unable to pay, you have options. We’ll go over out what can potentially happen and how to best handle the situation.

What happens if you’re unable to repay a payday loan?

Payday loans can be a quick fix for immediate cash needs. But if you can’t repay them on time, it can cause trouble. Here’s what you might face if you default.

You’ll be charged fees

If you miss a payment, expect extra charges. The payday lender may charge a late fee for missed payments. Most lenders will attempt to withdraw the money directly from your bank account. They may trigger bank fees.

If you do not have enough funds in your account, you may end up with overdraft charges. If the lender is able to withdraw funds, they could empty your bank account. A low balance or empty account can cause the bank to decline other transactions and charge you with an insufficient funds fee. Many banks will charge fees per failed withdrawal attempt. Be aware of these bank fees, which can pile up quickly.

Debt collectors may call

When you can’t afford payday loan repayment, your lender may sell your debt to a collection agency. Debt collectors can be aggressive. Expect persistent calls and letters as they try to recover the money.

You may be taken to court

If the debt collection agency’s efforts fail, they might take you to court. In court, lenders have to prove that you owe them money. The judge will dismiss the case if they cannot provide loan documentation or the signed loan agreement or if the loan is past the statute of limitations.

Never ignore a lawsuit. If you do not show up, the judge will issue a default judgment on the lender’s behalf. A judgement can result in bank account levies, property liens, or wage garnishment.

Your credit score may drop

Defaulting on any loan can harm your credit. Many payday loans are only reported to credit bureaus if you default and the loan is sold to a collection agency. If that happens, it is a negative mark on your credit report. The mark will stay on your report for up to seven years. It can affect your ability to get other types of credit or loans in the future.

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What to do if you cannot afford repayment

If you are unable to repay a payday loan, don’t panic. There are steps you can take to address the situation.

Stop electronic withdrawals

One of the first steps is to halt all electronic withdrawals from your bank account. If you remove the lender’s electronic access, they cannot try to collect payment and overdraw your account. Stopping electronic withdrawals will prevent insufficient funds or overdraft fees.

Negotiate with your payday lender

Lenders would rather collect money directly from you than sell your debt. They may be willing to accept a debt settlement – a lump-sum payment that is less than what you owe. Mention that you’re considering bankruptcy, and they will be more inclined to negotiate. With debt settlement, they’ll get something; with bankruptcy, they’ll get nothing.

Settling debt can save you money, but you will owe the IRS taxes on forgiven debts of over $600. Debt settlement can also harm your credit.

Another route is to ask for a payment plan. Many lenders are happy to work with you. It’s in their best interest to get paid, even over an extended period.

Be sure to get all agreements in writing.

Enroll in a debt management plan

A debt management plan (DMP) offered by a nonprofit credit counseling agency can help you get out of debt effectively and for less. Enroll your debts in a DMP, and the credit counselor will contact your lenders for a reduced payment plan. You pay the agency, which then distributes the money.

A debt management plan can simplify your payments and help you get back on track. You will have to pay a monthly fee for the service. And credit card companies may close your accounts.

If you want to avoid working with a credit counselor, you can consolidate payday loans yourself. Make sure that you can secure a debt consolidation loan with a lower interest rate and that you’ll save money.

Roll over the loan

Some payday lenders will let you extend the repayment deadline or, in other words, roll over the loan. You get extra time to find the money, but you will have to pay a fee.

Say you borrow $200 for a $30 fee. Roll it over, and you’ll still owe $200 but now have a $60 fee – plus the lender may charge interest on the original. It gets expensive fast.

Rolling over a loan provides short-term relief but can easily trap you in debt. This option is only available in some states.

Find emergency cash

If you need quick cash, consider alternatives.

Personal loans
Payday alternative loans
Cash advances via apps

Plenty of online lenders provide personal loans for consumers with poor credit. These are often installment loans, which are easier to repay. Many of these lenders offer same-day or next-day approval.

Consider a payday alternative loan (PAL) from a federal credit union. These loans are for small amounts – up to $2,000 – and their interest rates are capped at 28% APR (annual percentage rate). They are often much more affordable and designed for consumers with poor credit.

Cash advances or paycheck advances can help you cover costs for less. Most do not charge interest or conduct a credit check. The fees are minimal, and many, like the optional tip and fast funding fee, are avoidable.

Seek financial assistance

Look for local financial assistance programs or charities. You can find programs to help with rent, utilities, or food, which can free up money to repay loans. Call 211 to find assistance programs in your area.

How to rebuild credit after defaulting on a payday loan

Defaulting on a payday loan can hurt your credit score. With some patience and discipline, you can fix your credit.

Bring all accounts current

The first step is to catch up on any overdue payments. If necessary, contact creditors to discuss payment plans. Paying off debt can prevent further damage to your credit score.

Pay your bills on time

Paying on time is the best thing you can do to improve your score. Set up automatic payments. Put reminders in your calendar. Anything that will keep you from missing a payment. A positive payment history will do wonders for your score.

Lower your credit usage

Your credit utilization rate – how much of your credit limit you’re using – is the second most significant credit scoring factor. Aim to keep your usage below 30%. High credit card balances will harm your score. Pay as much as you can each month to lower the amount of credit you use.

A delinquent account dragging you down?

Find out what you can do about it.

Keep old accounts open

Older accounts contribute to your credit history length. Avoid closing old accounts, as they show lenders your long-term credit behavior. Let them stay open to maintain a positive credit history length.

Limit new applications

Every time you apply for credit, the lender will conduct a hard inquiry and lower your score slightly. Submit multiple applications at once, and you’ll do more damage to your score.

New accounts also lower the average age of your credit history. Lenders prefer consumers to have longer histories since it gives them more data to go on.

Monitor your score

Regularly check your credit score to see your progress. You can get your credit report once a year for free from annualcreditreport.com. Review your report from each bureau for errors and dispute any inaccuracies. Mistakes could be dragging your score down unfairly.

Frequently asked questions

1. What happens if you cannot pay back your payday loan?

If you can’t repay, you may face additional fees, collection attempts, and potentially legal action. Lenders might sell your debt to collectors, who can be persistent in recovering payments. Defaulting can also harm your credit if your lender reports the debt to credit bureaus. The best thing you can do is find a way to repay the money.

2. Can lenders freeze your bank account?

Lenders can freeze your bank account if they obtain a court judgment against you. If you default and the lender successfully sues you, the court may issue a judgment allowing the lender to freeze your account or garnish your wages to recover the owed amount.

3. Can you go to jail for not repaying a loan?

You will not do jail time for failing to repay a loan. Debt is considered a civil matter, not a criminal one.

4. Do payday loans ever go away?

Payday loans do not disappear but are subject to a statute of limitations. After the statute of limitations has passed, lenders cannot legally sue you to collect the money. The exact timeline and rules vary by state. A default account will stay on your credit report for up to seven years.

Bottom line

Payday loans can be challenging to repay. When you don’t have the money to repay the loan, you may incur bank fees, pay extra to roll it over, or face a lawsuit. Payday loans can get expensive fast. To add insult to injury, your credit score will drop.

If you know you won’t be able to pay, contact your lender as soon as possible. Ask if they’ll settle the debt or if they can set up a payment plan. They may be especially willing to work with you if you threaten bankruptcy.

You always have options. And next time you’re short on cash, consider some less expensive ways to borrow, like cash advance apps or payday alternative loans. With a little effort, you can cover your expenses without going into debt.

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Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

What Happens If You Cannot Repay a Payday Loan?

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What happens if you’re unable to repay a payday loan?