Do Payday Loans Go to Collections? What Happens Next

A payday loan is a short-term, high-cost loan, typically for $500 or less, designed to be repaid by the borrower’s next payday. These loans often carry very high interest rates, with annual percentage rates (APRs) that can reach nearly 400 percent. Due to their structure, borrowers sometimes find themselves unable to repay the loan on time, leading to concerns about debt collection.

What Happens Before Collections

When a borrower misses a payday loan payment, the original lender typically initiates immediate collection efforts. This often involves repeated attempts to electronically debit funds from the borrower’s bank account, and sending frequent calls and letters demanding payment. Late fees and additional interest can quickly accrue, increasing the total amount owed beyond the initial loan. The lender may also offer to “rollover” the loan, extending the due date in exchange for more fees, which can trap borrowers in a cycle of debt.

If the original lender’s internal collection attempts are unsuccessful, they may decide to sell the debt to a third-party collection agency or assign it for collection. This transfer typically occurs after 60 to 90 days of non-payment. The original lender then ceases direct collection efforts, and the debt becomes the responsibility of the new entity.

The Role of Debt Collectors

Once a payday loan debt is in the hands of a collection agency, new rules apply. A debt collection agency is a company hired by creditors to recover unpaid debts, or it may be a debt buyer that has purchased the debt for a fraction of its original value. These agencies primarily contact debtors through phone calls, letters, and emails to negotiate payment arrangements or demand full repayment. Their goal is to recover as much of the debt as possible.

Consumers have specific rights under the Fair Debt Collection Practices Act (FDCPA), a federal law preventing abusive, unfair, or deceptive debt collection practices. Under the FDCPA, debt collectors cannot harass, threaten, or use profane language. They are also restricted from calling before 8 a.m. or after 9 p.m. in the consumer’s local time zone. Within five days of initial contact, a debt collector must send a written validation notice that includes the amount of the debt, the name of the creditor, and a statement of the consumer’s right to dispute the debt within 30 days. If the debt is disputed in writing within this period, collection efforts must cease until the debt is validated.

Impacts of Unpaid Payday Loans

An unpaid payday loan that goes into collections can have several negative financial consequences for the borrower. While original payday lenders typically do not report payment history to major credit bureaus, a collection account usually appears on credit reports. This can significantly lower a credit score, making it difficult to obtain future loans, credit cards, or even secure housing. The negative mark from a collection account can remain on a credit report for up to seven years.

Beyond credit score damage, collection agencies or debt buyers can pursue legal action to recover the debt. If a lender wins a lawsuit, a court judgment may be entered against the borrower. This judgment can lead to wage garnishment, where a portion of the borrower’s earnings is legally withheld to repay the debt, or a bank account levy, allowing funds to be seized directly from a bank account. Defaulting on a payday loan is a civil matter and does not result in arrest or jail time.

Steps to Address Payday Loan Debt

When faced with a payday loan debt in collections, a borrower can take actionable steps to address the situation. Communicating with the collection agency, preferably in writing, is a first step. Maintaining detailed records of all correspondence and conversations is advisable.

It is prudent to request debt validation from the collection agency. This requires the collector to provide proof that the debt is legitimate and that they have the right to collect it. Borrowers can often negotiate a settlement for a reduced amount, as collection agencies frequently purchase debts for less than their face value and may be willing to accept a partial payment to resolve the account. Any agreed-upon settlement or payment plan should always be obtained in writing before making payments.

For those overwhelmed by payday loan debt, seeking assistance from non-profit credit counseling agencies can provide valuable guidance. These agencies can help individuals understand their options, develop a budget, and sometimes negotiate with lenders on their behalf for more manageable repayment terms.