In 2019, more than 12 million Americans will turn to a payday lender for cash. This is usually in the form of a cash advance or payday loan. Most people have every intention of paying back the loan in full and on-time. However, as we all know, life happens – you have an unexpected expense, you lose your job, and your upcoming debt payment slips your mind. Whatever the reason, something prevents you from being able to pay off your small loans when you intended. Before you know it, the loan enters a scary sounding state, like Default, or Collections, and you start receiving ominous messages from the payday loan lender or a collections agency. It can all feel very overwhelming!
If you find yourself in this situation, don’t panic! Take comfort in knowing that you’re not alone in this – it’s estimated 71 million Americans have at least one debt in collections. This article will break down what happens when a brick and mortar or online payday loan goes into Late, Default, or Collections, and give you strategies to best manage the situation.
Need a refresher on payday loans? This overview of payday loans will help you get an in-depth understanding.
Terminology for Payday Loan Statuses
First things first, let’s get some terminology out of the way. Most lenders like a bank, credit union, or Possible use similar words to describe different statuses or states of a loan, whether it is a personal loan, short-term loan, payday loan, student loan, credit card, or something else. When managing your loan, it’s helpful to have a sound understanding of these terms and what they might mean for you:
- Current – Yay! This is the best loan state to be in. Your payments are up-to-date and you do not have any outstanding payments. All payments will be reported to the credit bureaus as paid on-time. In an ideal world, you’d always be in a Current status.
- Late – One or more of your loan payments are past due by at least 15 days. Some lenders may break this down even further by splitting out Late statuses into something like: Late (16-30) or Late (31-45). Either way, the best way to think of Late is that you’re slightly behind on your payments. Depending on the loan, you may experience some additional late fees and be at risk for negative impacts to your credit. The good news with a Late status is that you can often catch back up to a ‘Current’ status and finish the loan term with a paid-on-time status.
- Default – Payment(s) have been outstanding for an extended period of time. The amount of time depends on the lender but is typically at least 60 days late. At Possible, we consider a payment in Default if it has been 60 days late from the original payment date. When a loan enters a Default state, the customer is likely to experience negative consequences in terms of increased fees and/or negative impacts to their credit. In some states, like the state of Washington, lenders are required to report any customer in Default to a state database. As a result, this will prevent customers from obtaining new payday loans as other lenders, by law, cannot offer the customer a new loan until the original loan has been paid in full.
- Charged-off – While technically an accounting term, you may come across this term if you fail to pay off your loan. A loan moves to a charged-off state when there is a reasonable expectation that the loan will not be paid in full. The loan originator is accounting for this expectation by marking the loan as a loss in their accounting records. This typically happens right before a loan is sent to Collections. When a loan enters a charged-off state, the customer is likely to experience even more negative impacts to their credit score.
- Collections – At this point, the loan originator no longer thinks they can recover any money from the loan and sells the loan to a 3rd-party collections company to collect immediate cash. The collections agency will takeover all communications with the customer regarding the loan. The primary goal for the collections agency is to get the customer to pay something, even if it’s a really small percentage of the amount outstanding. In the industry, this is called “Settling.” Please note – if you settle, the loan will be reported to credit bureaus as ‘Settled.’ This status still carries negative consequences since the loan was never repaid in full.
- ‘Closed’ or Paid-off – Often used interchangeably, closed/paid-off mean roughly the same thing — your loan has been fully paid and there are no outstanding payments. Expiran does a good job breaking down the definition here.
What to Expect When You Can’t Repay a Payday Loan
Now that we understand some of the basic terminology, let’s walk through what you can expect if you find yourself not being able to repay a payday loan.
Inbound messages increasing in severity over time
No surprise here – one of the very first things you can expect is a message from the lender in which you took out the pay day loan. Normally, immediately upon failure of the first payment, the payday lender will send you a message letting you know that the payment(s) weren’t successful. These messages will include instructions on what to do next and how to make a payment. The expectation here is that you, as the customer, take some sort of action on the loan like making the payment successfully. If you don’t, it’s likely these messages will increase in frequency and severity. These messages will mimic the loan statuses mentioned above (Late > Default > Charged-off > Collections). Because you likely signed an Electronic Communication Agreement when you took out the loan, you can expect the lender to reach out to you through a variety of communication channels: email, SMS, voice, push notifications, and/or physical mail. These messages can feel extremely overwhelming. The main thing lenders are looking for is some sort of engagement from you. We recommend engaging with the lender and communicating your plan to repay the loan as soon as possible. Even if you cannot repay the payment in full immediately, working proactively with the lender may result in more flexibility, less stress, and a better end result.
Handoff to collections
If you don’t take action on the loan, it’s highly likely that you will be handed off to a 3rd-party collections agency. Typically, the original lender will send one last email requesting payment before letting you know that your loan has been passed off to a collections agency. Once given to a collections agency, you can expect a barrage of messages from them. Most of these agencies have advanced, automated messaging systems that send messages following a certain set of logic. As mentioned above, their primary objective at this point is to get you to pay at least some portion of the loan. The good news: you will likely be able to negotiate the cash settlement amount to a fraction of what is owed on the loan. The bad news: if you settle, this status might be reported to credit bureaus. This is because settling means you did not pay back the full amount of the loan. This will not only hurt your credit score but may also impact your ability to take out a loan in the future.
At this point, we recommend engaging with the collections agency and making an offer to settle. It’s in their best interest to settle, so you might be able to pay off the loan at a fraction of the original cost.
Impacts of not paying back a payday loan
By definition, there is little legal recourse a payday lender can take in recovering payments from a payday loan. These loans are, by definition, unsecured. That being said, there are negative consequences you should be aware of:
- Credit – Many payday lenders are now reporting the status of payday loans to credit bureaus. For most customers, this is seen as a huge benefit as it helps people establish and build credit such as through the Possible loan; however, if you’re unable to make repayments on a payday loan, you can expect to experience negative impacts to your credit. These negative consequences will only increase the longer you wait to pay back and next time a lender runs a credit check, you might be unpleasantly surprised at the drop in your credit score.
- Extra fees/interest – Depending on the lender and the state in which you live, you may be at risk to increased fees and interest if you’re unable to repay your loan. These extra fees often come in the form of non-sufficient funds (NSF) fees that the lender is able to charge as a result of an unsuccessful payment. Additionally, some states allow lenders to charge extra interest on outstanding payments, which means the interest on your payments will increase the longer you wait to make a repayment.
- Harder to obtain loans in the future – Not repaying your loan may impact your ability to obtain short-term financing in the future. Payday lenders have a couple ways to see if you’ve paid payday loans in the past, specifically: credit report checks (even soft pulls!) and bank transaction data analysis. If you want to keep open the possibility of receiving a payday loan in the future, it’s helpful to pay off your loans. Because once you default on a loan, your short-term lending and short-term credit options will likely be limited in the future. It may even impact whether you can get a checking account, credit card, or debit card in the future.
- Ongoing stress and anxiety – Carrying around debt can lead many people to feel increased levels of stress and anxiety. In fact, there is a name for it: debt-stress syndrome. It’s easy to ignore this impact, but for many people, it’s a very real consequence of not paying back a payday loan. If you find yourself feeling increased levels of stress or anxiety due to your financial situation, you can contact a professional or doctor for help. In addition, there are non-profit credit counseling options available if you do the research.
- Texas lenders turn to criminal prosecution – While not common in most states, in Texas some payday lenders are turning to the courts to criminally prosecute customers “by using the state’s bad check and theft by check laws and arguing that delinquent borrowers are committing fraud or theft.”
Strategies to manage the debt situation
Regardless of how dire the situation may seem, you’ve got options. In the section below, we’ll focus on strategies to best manage payday lending debt. If you’re looking for generic advice regarding debt management, we recommend checking out this NerdWallet article (it’s one of our favorites!): How to Get Out of Debt – 7 Tips That Work.
Understand the cost of all debt and pay the most expensive first. If you find yourself in a situation where you cannot repay a payday loan, it’s likely that you may have some other debt you need to address. We recommend going through all of your outstanding debt and identifying the following information: fees and interest, finance charge, amount outstanding, and due dates. From here, there are two schools of thought: quick wins by paying off small debt vs. long-term approach of paying highest interest first from the extra you have available in your bank checking account. There are also payday loan consolidation products out there, usually in the form of personal loans. Be sure to calculate the annual percentage rate (APR) on your debt to compare things on an apples-to-apples basis. Here at Possible we believe people should optimize for long-term financial wellness, and thus, should first focus on loans with the highest fees & interest.
Ask your lender for an extended repayment plan – Most lenders and financial institutions are governed by state regulations when it comes to repayment plans. Depending on the state in which you live, you may be entitled to an extended repayment plan. These plans often allow customers to pay back the loan over an extended period of time, with no additional fees or interest, and may even allow you to split up payments. For instance, in the state of Idaho the extended repayment plans “must provide for at least four (4) equal payments over a time period of not less than sixty (60) days.” To find out if you’re entitled to an extended repayment plan, contact your lender or visit your state’s online department of financial regulation.
See if the lender allows for a grace period – Some lenders, in addition to extended repayment plans, may offer what’s known as a “Grace Period.” These grace periods give customers additional flexibility with regards to the exact timing of when money will be withdrawn from their account. While the underlying payment dates on the loan contract may not change, the date of the Automatic Clearing House (ACH) instructions (i.e. the date the money will be withdrawn from your account) can be changed through changing the “Grace Period.” In addition to giving yourself some more time to repay, you should not incur additional loan fees or negative consequences to your credit score by taking advantage of a grace period. To find out more, contact your lender to see if they offer grace periods.
Evaluate whether a rollover is worth it – In some states, you’re able to refinance your amount outstanding with a new loan. However, we do not recommend this approach as it can often lead a borrower into further debt and potentially send people into a debt spiral. This approach should be used sparingly and only if you are certain that you can repay both the original loan and the rollover loan. Here at Possible we believe that rollovers often trap a borrower in a bad debt cycle. As such, we do not offer rollovers in any state in which we operate.
Settle with a collections agency for a fraction of the cost – If you find yourself in a situation where you simply cannot make a repayment, there is a high likelihood that your loan will wind up with a collections agency. If this happens to you, it’s important to know that you can negotiate with these collections agencies. Their primary objective is to receive some money from you. So make an offer and see if they take it!
Save and make a monthly payment – Perhaps the best thing you can do is budget, save, and make a payment. This debt will likely not go away anytime soon. The best thing you can do is to come up with a game plan for how you can save enough to make a payment on the outstanding balance.
NOTE: Beware of abusive collection practices – We have heard from a lot of our customers about abusive practices related to collection agencies. Please note – all collection agencies must follow a very specific set of laws and regulations in order to collect funds. Below are some of the most common abuse practices used by collection agencies:
- Abusing communication laws and guidelines by contacting customers outside of approved hours and/or sending multiple communications in a single day
- Making unsubstantiated threats in the form of increased costs and/or other punitive actions
If you’d like more information about debt collection laws in your state, please check out your state’s consumer protection site.
How does Possible think about this defaulting and collections
To best understand how we think about fund recovery and collections at Possible, a payday loan alternative, it’s helpful to first understand our Core Values: Empower with Trust, Serve with Empathy, and Succeed with Grit. All of these values play a crucial role in how we think about collections and fund recovery at Possible. Like the Core Values article mentions, we not only trust each other but we hope to build deep and lasting trust with our customers. This trust goes both ways. Our customers place a lot of trust in us; we place a lot of trust in them. This core tenant of trust is at the center of how we think about fund recovery and collections.
First, we trust that the vast majority of people who take out a loan with us have a genuine intention of repaying that loan. This is core to how we approach fund recovery. An example of this is with our messaging to customers who have failed a payment or enter a late/default state. We strive to make our messaging to customers reflect that trust.
Secondly, as it relates to ‘Serve with Empathy’ we’re working to build an approach to fund recovery that puts us in our customers’ shoes. We do this in a couple ways:
- We only re-attempt failed payments if we have high certainty that the customer has enough income to cover the payment. This is because we try to put ourselves in the shoes of a customer. We know overdrafts are a very real thing and we don’t want to be the cause of an overdraft for our customers.
- We try to give customers ample warning if we do re-attempt a failed payment. This gives the customer time to let us know if the upcoming attempt needs to be adjusted.
These two things are not required by law, but what we’ve determined here at Possible are the right things to do.
If you are a current customer and think we can do a better job when it comes to managing customer who cannot repay their loan, please let us know. We welcome the feedback to improve the process and make it better for customers. If you’re looking to apply for a Possible loan, download the Possible app and borrow money today!
