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What happens when you can’t repay a payday loan?

You’ve been fired, but you still have to pay rent. You’re short on your car payment and need a little extra help. Your electricity has gone out and you need to find a way to pay your overdue bill to get it back on.

Sometimes you need a little money to get by. So you get a payday loan and pay your bills. But what happens when you can’t repay a payday loan? Here’s what to do if you get caught in this borrowing trap.

What is a personal loan?

A payday loan is a short-term loan taken out for a small amount, usually $500 or less. Depending on state laws, you can get payday loans in person or online.

You take out a payday loan by writing a post-dated check for the full balance, including fees and interest that will accrue when the loan is due. You can also authorize the lender to automatically debit the full balance from your bank account on the due date.

Payday lenders can charge high fees for the money you borrow. Mike Sullivan, personal finance consultant for credit counseling agency Take Charge America, said APRs were around 400%. It can be difficult to stay up to date on your bills and your loan with such a high interest rate.

“A loan of $200 for 14 days may require a payment of $235, or $35 [in] interest,” Sullivan said. “Borrowers typically focus on the payment amount and disregard the total cost.”

What happens when you can’t repay a payday loan?

According to The Pew Charitable Trusts, Americans spend $30 billion a year borrowing from payday lenders and other small lenders. So if you’ve taken out a personal loan and are having trouble paying it back, you’re not alone. Payday loans disproportionately affect underserved communities, where individuals might not have the resources to use traditional financial institutions, such as banks and credit unions.

“Payday loans are usually taken out by people with very poor credit who can’t find the money for their immediate needs, like food, gas or rent,” Sullivan said. “These borrowers often don’t have other options to borrow from.”

When you take out a payday loan, many lenders don’t check your credit or care about your financial situation. If you don’t have stellar credit, that might sound like a good thing. But that will only plunge you into deeper financial despair.

“Payday loans are a trap, and there’s not much a borrower can do once trapped,” Sullivan said. “At some point, these loans often become unsustainable and the borrower defaults.”

A default occurs when you cannot repay your loans on time. This can lead to a drop in your credit score, garnishment of your wages, and high interest rates on your future loans. Your loan could also be handed over to a debt collector, who will work to get you to pay off your debt in full. Do your best to avoid defaulting on your payday loans.

What to do if you can’t repay your payday loan

If you’re struggling to break out of the payday loan cycle, here’s how to get out of it.

1. Check your debt

Review all your debts, from your payday loan to overdue bills. Focus on those with the highest interest rates. With high rates, the longer you take to settle the debt, the more you will end up paying.

2. Extend your repayment plan

Ask your lender for an extended payment plan, which is usually granted if your lender belongs to the Community Financial Services Association of America. However, you must request an extension before the last day your loan is due.

You will also sign an amendment to your loan agreement. Read it and make sure you understand the new terms and the new interest rates you are agreeing to. You may be able to get a few extra weeks to pay off your loan.

3. Consider a personal loan

Don’t be afraid of the big banks, at least not when it comes to personal loans. Payday loans and personal loans may sound similar, but they are not the same. Make sure you know the difference between personal loans and payday loans.

Taking out a personal loan can help you pay off your debt. These loans have much lower interest rates and longer repayment terms than payday loans. If you have bad credit, you’ll be happy to know that you can even find personal loans for credit scores below 550.

4. Try a credit union

Credit unions and payday lenders have a lot in common. You can usually find one near you offering small installment loans that can help you make large payments. Many credit unions offer Alternative Payday Loans (ALLs) to their members.

Although you must be a member of a credit union for at least one month, you can get anywhere from $200 to $1,000 with terms of one to six months. The interest rate on a PAL is much lower than the interest rate on a payday loan, up to 28%.

5. Get help

When you’re in a tough spot, it’s always a good idea to get help, whether it’s from a credit counselor or a co-signer for a loan. Asking for help is an important step in getting on the right track.

You can get help from the National Federation of Credit Counselors. Make an appointment with someone who can directly assess your financial situation.

If you’re trying to get a personal loan and your credit score isn’t great, you might want to find a co-signer. A co-signer can be helpful, but remember that the loan will impact both of you. You both need to be careful when taking out a loan together.

If you have friends and family who can help you out in a pinch, use their resources. Repaying loved ones is much easier than a payday lender.

Find your freedom

You might consider a payday loan, but you don’t need one. When you can’t repay a payday loan, there are plenty of alternatives to consider. If you already have one, be careful and know your rights. Explore ways to pay it off as soon as possible so you don’t get trapped in debt.

Forget filling out tons of forms. Finding your best personal loan rate is now easier than ever.

Disclaimer: Student Loan Hero is an affiliate of LendingTree.

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How is the student loan hero paid?

How is the student loan hero paid?

Student Loan Hero is compensated by the businesses on this site and this compensation may impact how and where offers appear on this site (such as ordering). Student Loan Hero does not include all lenders, savings products or loan options available in the market.

Advertiser Disclosure

Hero Loan Hero Advertiser Disclosure

Student Loan Hero is an ad-supported comparison service. The site features products from our partners as well as institutions that are not advertising partners. Although we strive to include the best deals available to the general public, we do not guarantee that this information represents all products available.

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9.99% – 35.99%4 $2,000 at $36,500

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