Because payday loans are so easy to get, a lot of people take them out irresponsibly and then find themselves unable to pay back the loan. According to one report, more than 70% of payday loans are actually repeat loans from people who failed to pay off the initial amount! Payday loans are meant to be for the short term solutions only. If you don’t deal with them in the short term, they can make a lot of problems in the long run.
Rollovers
Many payday lenders give borrowers the option to rollover their loan. This means that they will be able to carry the loan until their next payday. Of course, the lenders don’t offer you this service out of the kindness of their hearts! You will usually have to repay any loan fees plus pay the high interest on the original fees and accumulated interest. With some lenders, the interest rate (which is already high for payday loans) will increase for rollovers. You should always avoid payday loan rollovers because it will end up costing you a lot more than you originally calculated.
Many states have set laws protecting borrowers from getting into large debt by frequently rolling over payday loans. The laws prohibit or limit the number of rollovers which a lender can offer. Be sure that you know your state’s laws before taking a payday loan.
Default
If you have exhausted your rollovers and still can’t pay off your payday loan, then your loan will go into default. The first thing which will happen is that the lender will try to cash your postdated check (or withdraw the money from your account). Without sufficient funds in the account, the check will bounce. You will then be stuck with a fee from your bank as well as the payday loan amount.
It usually doesn’t take long before the lenders starts sending mails and calling to collect their money. They will almost immediately contact the credit bureaus to report your late payment. If you have longstanding good credit, then this one default shouldn’t affect it too much. But, if your payday loan stays unpaid for a long time, it could devastate your credit score and make it impossible for you to get other loans.
After a payday loan has been in default for a very long time, your loan will usually get sold off to a credit collection agency. If this happens, it will really destroy your credit score for at least 10 years. In some states, lenders are allowed to sue or take other legal actions against people who fail to repay their payday loans. Again, this is why it is good to know the laws in your state before taking a payday loan.
When used responsibly, a payday loan is a great way to get over an immediate hardship or unexpected expense. But never take out a payday loan if you think you may not be able to pay it off in full at the end of the term because it could end up costing you a lot!