Facing Financial Struggles: What to Do When You Can't Repay Your Payday Loan
Payday loans are a fantastic option to consider for your short-term financial needs. They generally have a shorter term than traditional bank loans, so the repayment needs to be done within 2 to 4 weeks. However, if you cannot afford to repay the payday loan in one lump sum, you can consider renewing or rolling over the loan.
Rolling over a loan is common to avoid falling behind on payments or defaulting on payday loans. Over 80% of payday loans are rolled over or followed by another loan within 14 days. (Consumer Financial Protection Bureau)
What Happens When You Can’t Repay a Payday Loan?
When you fail to pay back your loan on the due date:
- The payday lender will charge a fee if you do not have enough money in your account on the due date. Also, your bank will charge an overdraft fee if your check bounces.
- Defaulting on loans negatively affects your credit score, and this negative remark can stay in your credit report for seven to ten years. This can reduce your chances of borrowing in the future.
- Even in the future, if you get a loan with poor credit score, you will be asked to pay higher interest rates. Paying higher interest rates means you will pay more money over the life of the loan and this can negatively impact your budget.
- Your loan recovery goes to a debt collector who will contact and ask you pay to back your loan amount in full.
How to Avoid Defaulting on Payday Loans
The following options can help you when you are struggling to repay your payday loan:
1. Extend Your Loan
Many payday borrowers who cannot repay their payday loan extend the loan. All you need to do is sign an amendment to your loan agreement with a new interest rate and new terms. This will provide you a few weeks to repay your payday loan.
2. Ask Your Lender for a Payment Plan
Before your loan comes due, you need to notify your lender that you cannot repay your loan on the due date. Talk to your lender about consolidating your payday loans. They can suggest any monthly payment plan or installment plan.
If your lender offers an installment plan and allows you to repay your loan amount by the plan, ensure to make payments on time to avoid further risks. You do not need to pay anything to your lender for enrolling into an installment plan.
3. Consider Taking a Personal Loan
You can take out a personal loan to repay your payday loan. Then, you can concentrate on repaying your personal loan on the schedule that works for you. A personal loan has a longer term, so you can pay back your loan amount over several months.
If you have taken a payday loan, explore ways to repay it to avoid defaulting on it.
