In most cases, a borrower's credit score is not a determining factor when applying for a payday loan. Payday loans are short-term unsecured loans often payable on your next payday. According to 2016 studies, 12 million Americans borrow money from payday lenders annually to pay it back when their next paycheck arrives.

On average, each borrower will spend $750 in fees for the $9 billion in loans they take out. Payday loans have an extremely high default rate. Another study found that half of all payday loan borrowers defaulted on their loans within the first two years.

Why and How Defaults Occur

Payday loans do not usually need a credit check, but they require a postdated assessment or electronic access to your bank account. Payday loans require repayment on the due day when you must either pay the principal in person or allow the lender to deduct the amount owing directly from your checking account.

Even if your bank does not cover the overdraft, the lender will keep attempting to get their money out of your account. In addition to the payday lender trying to collect on a loan, you'll rack up fees from your bank for insufficient funds every time a payment is returned.

Payday Loans: The Repercussions of Nonpayment

Payouts From Your Checking Account

On many occasions, most lenders will try to debit the agreed-upon amount from your bank account. Your bank may initiate withdrawals for lesser amounts if the transactions are denied owing to inadequate money.

Although the lender may be able to recover a part of the unpaid debt via this approach, you may still run into problems making ends meet if your bank refuses to process any of your transactions. The bank fees alone might be hundreds of dollars in a hurry.

Intervention from Collection Agencies

The lender will commence collection procedures, which may include calling and writing you several times to request payment before finally attempting to draft your account. The lender may employ a lawyer or sell your debt to a collection agency to recoup their losses.

The lender may be willing to delay collections if you ask for more time. Payday loan companies in several states must work with customers who want longer repayment terms. Keep aware that extra charges, such as interest, may be associated with the extension.

Faltering credit rating

When a lender hands over a delinquent account to a collection agency, it may also report it to the credit bureaus. A negative item on your credit report can be there for up to seven years, causing your credit score to drop. So, it can be hard for you to get good financing terms in the future. After missing payments on a payday loan, there are steps you may take to begin repairing your credit.

Consequences for Your Credit

Since payday lenders don't often verify applicants' credit histories, yours will remain unscathed. A collection firm will put the debt to your credit record, though. This is why failing to repay a payday loan might hurt your credit rating. The overdrafts may also affect your future eligibility to open a checking or savings account. Even while most people are aware of credit reporting bureaus, few individuals realize that multiple reporting agencies are used by banks and credit unions when vetting new account applicants.

Hard-Core Payday Loan Collection Practices

In the event of a debt default, either your lender or a third-party collection agency may file a lawsuit against you to recover any unpaid monies. If a court rules that you must pay the damages in a case, a judgment will be recorded against you.

Wage garnishment and bank account levies are two methods that payday lenders might use to collect on a judgment against you. If you ask debt collectors to cease calling you, they must comply with your request.

This does not, however, cancel the debt. An additional collection agency may take over the case and continue to contact you until you pay the bill or file a lawsuit to have the debt removed from your credit report.

Staying Away From Payday Loans

One of the most costly lending options is a payday loan. It's also among the trickiest forms of credit to repay. Five months out of the year, the typical payday loan customer owes money and pays back over $500 in interest and fees. Payday loans have incredibly high-interest rates compared to other loan types.

However, this is not readily apparent because lenders do not disclose these rates. Instead, you will pay a set rate for every $100 borrowed, such as $15. That works up to an annual rate of 400% for a two-week payday loan. A credit card's average annual rate is 20% to 25%.