What Happens if I Close My Bank Account and Default on a Payday Loan

What Happens if I Close My Bank Account and Default on a Payday Loan

Whether it was an unforeseen car breakdown demanding immediate attention or the pressing need to afford crucial medication, the urgency for quick cash might have been paramount. Whatever the financial situation, the need for emergency funds led you to a payday lender.

Now it’s time to repay the loan, and repaying it may potentially damage your budget for the next month. But what will happen if you close your bank account and don’t repay the loan until your next paycheck?

Can’t Repay a Payday Loan — Potential Consequences of Default

If you can’t pay back a payday loan, the debt won’t vanish. Each situation is different. However, there are common consequences for borrowers who don’t repay on time.

You Will Have to Pay Even More in Interest and Fees

Not paying the loan on time doesn’t free you from responsibility. You’re still on the hook for paying back the loan and its interest. Interest adds up to the original amount and is calculated at the agreed rate. Fees may include various administrative charges, fines, and penalties.

For example, if you needed to pay $45 for a $300 loan and did not fulfill your obligations, you may have to pay up to $70 for bank overdraft fees (if the lender allows two attempts). Thus, the loan payment increases to $415. Late payment fees are also added, often around 5% ($22). So, in just one day, you owe $437. This does not take into account the commission for extending the loan.

Default On a Payday Loan Lowers the Credit Rating

A low credit rating carries risks for the lender, leading to a higher rate of loans. Additionally, negative information about default on a payday loan is stored in your credit report for up to seven years. In the future, there may be many problems when obtaining a loan.

Your Details Will be Passed to a Collection Agency

If you decide to close your bank account and not repay the loan, no online lenders will spend time trying to recover the money. Eventually, information about you will be passed to a collection agency. Anticipate receiving frequent calls from debt collectors, legal letters demanding payment, and even potential outreach to relatives or friends. This creates additional pressure and forces the borrower to repay the payday loan or consider debt consolidation.

You Might Have to Appear in Court

If you don’t pay back a payday loan, the lender or debt collector may take legal action. If you owe money to multiple payday lenders, you could face multiple lawsuits. Sometimes, you might not know about a lawsuit until you get a summons in the mail. Don’t ignore a court summons, as not showing up could lead to the creditor winning the case.

If you lose your court battle, a judge may grant the lender the right to garnish your wages. Bank account levies and property liens are also possible.

Closing the Bank Account – Is It the Right Decision?

Borrowers often close the bank account when unable to pay off a payday loan. Statistics show that only 14% of borrowers can allocate the full amount from their monthly budget to repay a payday loan. 76% of borrowers decide to extend their loan or take a new one.

Some people withdraw funds from their bank account and then request its closure. In this case, the automatic payments will be declined. However, if you consider it a way out of your situation, it is not. The closure will hurt your banking history, potentially affecting your overall banking profile. Therefore, closing a bank account has negative consequences.

Can I Cancel a Payday Loan Agreement?

Borrowers can cancel a payday loan in the following states:

  • Alaska,
  • California,
  • Hawaii,
  • Iowa,
  • Louisiana,
  • Maine,
  • Minnesota,
  • Mississippi,
  • Nevada,
  • North Dakota,
  • Oklahoma,
  • Rhode Island,
  • Virginia.

There are 2 working days for this from the moment it is signed. These two days are called the cooling period. In such a case, specifying the reason for cancellation is not necessary. You are simply obligated to return the borrowed money, without the need to pay any fees or penalties.

If the 2 days have elapsed, then the contract can only be terminated in the event of the lender’s failure to comply with the rules. If the lender:

  • did not provide a copy of the agreement immediately after its signing,
  • did not transfer the funds within the specified period,
  • did not transfer the funds within the specified period,

then you can cancel the loan before payday.

If all the rules have been followed, then it is not possible to terminate the loan agreement.

Why Is It So Easy to Get into Trouble with a Payday Loan?

Payday loans are convenient for financial emergencies. However, the temptation of fast money can hide the risks. This can lead to not paying back the loan.

Easy Access

To qualify for a payday loan, an applicant must:

  • be 18 years of age or older;
  • be an American citizen or permanent resident;
  • prove that he has a steady source of income;
  • have an active bank account.

People with low credit scores and low income can easily access money. As a result, they take on more financial responsibilities than they can afford and become stuck in a debt trap.

Expensive Fees

A $500 payday loan for two weeks might have an interest rate of over 300% annually. Thus, by the end of these two weeks, borrowers will owe $575. Payday loans usually require borrowers to renew or roll over their loans, which means paying additional fees and penalties.

What to Do If You Can’t Repay a Payday Loan

If you have troubles, or cannot pay off your payday loan, you have several ways to handle it.

Get a Debt Consolidation Loan

Debt consolidation combines all debts into a single large loan. With one monthly payment, usually at a lower interest rate. It simplifies managing payments, lowering the risk of missing any and improving your credit score.

Extend the Loan

Extending a payday loan gives the borrower additional time to pay off the debt. But extending a payday loan incurs additional fees. These fees can quickly accumulate, making the loan even more expensive in the long run.

Take Out a Personal Loan

Personal loans and payday loans serve different purposes. Getting a personal loan can help with paying off a payday loan. Personal loans usually have lower interest rates, even if your credit isn’t perfect. Lenders want you to pay back your debt on time. They often create a repayment plan that works for both sides. Unlike payday loans, where you usually have to pay back everything in a few weeks, personal loans give you several months to repay.

Borrowing from Friends or Family

Borrowing from Friends or Family

Do not postpone and do not hope that the debt will magically disappear — it’s not the case. «Debt doesn’t vanish on its own. Don’t wait for a miracle; take responsibility and address it,» says Elizabeth Warren, a US Senator.

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  1. What Will Happen If I Close a Bank Account and Not Repaying a Payday Loan?
    Not meeting loan obligations could lead to a creditor suing you. This action will reduce your credit score and hinder your ability to open new bank accounts.

  2. How Does Non-payment of a Loan Affect Your Credit Rating?
    In the credit report, a mark appears indicating an unpaid loan. It will remain in history for up to 7 years.

  3. Will I Be Held Liable for Failing to Pay My Payday Loan?
    Penalties, late payment interest, and possible legal action may apply.

  4. How Does Failing to Repay a Payday Loan Affect My Ability to Open a New Account Later?
    A bank or credit union may view you as a risk and reject your application for opening a new account.

  5. There is an Unauthorized Withdrawal From My Bank Account From a Lender. How to Solve a Problem?
    You are protected by federal law. Any unauthorized transfers from a bank account may be challenged. You need to contact the bank and the money will be returned.

  6. Is it Worth Taking Out a New Loan to Pay Off the Overdue Payday Loan?
    This risks creating a cycle of debt with high fees and interest rates. It is better to explore other repayment options.