Those who need a temporary cash infusion often consider a payday loan, at the expense of incredibly large interest rates. Payday loans are fairly easy to get, since most companies do not perform a credit check, but instead require collateral or proof of income.

Identification

Payday loans are much like actual loans, and one can default on them if they are not paid back on time. As a matter of fact, defaults on payday loans are common, as rates can effectively reach almost an 800 percent annual percentage rate (APR) when one factors in fees and the timespan of the loan. A two week loan of $100, for example, may cost $125 when paid back, which amounts to an APR of 650 percent over 14 days.

Effects

The effects of defaulting on a payday vary from state to state, but the borrower eventually needs to pay back the creditor. If it must, the courts may order a garnishment on a salary and/or levy liens.

Common Reasons for Default

Typically, the payday loan company allows the debtor to pay extra fees to roll the loan over to the next payday (hence the reason payday loans usually last for two weeks). The lender, however, usually limits the life of the loan to 12 weeks--the debtor must pay the balance after this time. In addition, if a person puts up a personal check as collateral and does not possess enough funds in their account, the check bounces and the person is considered in default.

Prevention/Solution

Some payday loan companies may allow a person to negotiate their loan if it looks like they will default. Although not very common, the payday loan company may decide it less risky to simply get back the amount the person borrowed.

Tips

As of 2009, 12 U.S. states enforce limits on the interest rates on a loan. If the usury on a payday loan ever exceeds this, the debtor may sue and only owe the principal on the loan.

Source:

Bills.com; All about payday loan default ; 2007

ConsumersUnion.org; Fact Sheet on Payday Loans

WhaleHookLoans.com; What Can Happen If You Default On A Payday Loan?

More Information:

PowerPaydayLoan.com; Can Payday Loans Affect Your Credit?