Debt Relief Experts
Owing money on a payday loan can be daunting, but this is especially true if you can’t repay your payday loan on time. These short-term, high-cost loans seem like a quick solution to money needs – they don’t require a credit check and are typically due by your next payday. However, missing a payment can lead to your payday loan being sent to a collection agency, negatively impacting your credit report and potentially having money seized from your bank account.
What happens to Canadians who can’t repay their payday loans? Today, I will explain what steps to take if your payday loan is in collections.
Table of Contents
What happens if you don’t pay back your payday loan?
Failing to repay your payday loan will make your financial situation worse and can have severe consequences, including:
Collection calls: If you don’t pay your payday loan, it can be sent to a collection agency, subjecting you and your references to collection calls from debt collectors. Once a payday loan is in collection, it will appear as a negative item on your credit report.
A second attempt to collect from your bank account: Payday lenders typically have you sign a pre-authorized debit against your bank account with the amount due when or shortly after you receive your next paycheque. Depending on the province, the lender might retry an automatic payment if there was not enough money in your account to repay the loan the first time. Some provinces do not allow repeat payment processing (Ontario), while others limit processing attempts to two.
Additional fees and interest costs: You will face additional fees from your payday lender at a very high interest rate on your outstanding balance. This further increases the cost of borrowing in an already financially strained situation. In Ontario, regulations governing late fees from payday lenders cap the maximum interest rate at 2.5% per month on the balance due. If you owe $1,200 on a payday loan, that is an additional $30 in interest costs the first month, increasing from there as interest charges compound.
Bounced payment charges: Both your payday lender and financial institution will charge an insufficient fund (NSF) fee for a bounced payment unless you have overdraft protection. Ontario law limits bounced fees from payday lenders to $25 per missed payment.
Potential lawsuit: While a collection lawsuit from a payday lender is rare, it remains a possibility, with potential consequences including the seizure of funds from your bank account or a wage garnishment in which they may contact your employer.
Harm your credit score: Ultimately, missed, late, or non-payments on your payday loan can severely harm your credit score, creating long-lasting repercussions for your financial health.
Strategies for dealing with payday loans in collection
When dealing with payday loan collections, knowing your rights and having a plan for communicating with debt collectors is important.
Familiarize yourself with what debt collectors can and cannot do. In Ontario, for example, collection agencies must notify you by letter or email before they can contact you to collect. They can contact you by phone or text on a Sunday between 1 p.m. and 5 p.m. local time and on a Monday to Saturday between 7 a.m. and 9 p.m.
If you speak with a debt collector, remain calm and professional. If they threaten or bully you, hang up and consider reporting them for harassment.
If you negotiate a payment agreement, document everything and get any repayment plan or settlement in writing before making any payments.
The debt collector may accept a debt settlement if you can’t pay the full amount.
If you cannot come to an agreement or the amount is more than you can afford to repay, consider options like a consumer proposal or bankruptcy.
Once you have paid off a payday loan, avoid payday loans in the future by considering alternatives to payday loans, including taking out a small loan from a credit union, getting a cash advance on your credit card, borrowing from friends or family and finding ways to reduce expenses so you can build a small emergency fund.
FAQs about payday loan collection
Let’s take a look at some of the most frequently asked questions regarding collections and payday lending.
Do payday loans show up on a credit report?
Payday lenders usually do not report payday loan activity to the credit bureaus, but they do report installnent loans or lines of credits. Since payday loans typically do not appear on your credit report, borrowing a payday loan is unlikely to affect your credit score. If you default on a payday loan and it is assigned to a third party collection agency, the collection account will be reported to TransUnion or Equifax, negatively impacting your credit rating.
Can payday loan lenders take you to court in Canada?
In Canada, payday loan lenders have the legal right to take borrowers to court, garnish wages or seize personal property if they default on the loan. While the decision to pursue legal action varies among lenders, some payday loan lenders may choose to sue you in small claims court to recover the debt.
It’s important to note that each province in Canada has laws and regulations regarding payday loans and debt collection. The Limitations Act outlines the time frame for creditors to pursue legal action to collect unsecured debts – two years in Ontario.
In Ontario, payday lenders must be licensed and follow the rules of the Payday Loans Act. Debt collectors must be registered under the Collection and Debt Settlement Services Act.
Can payday loans contact your employer?
A payday lender can contact your employer to confirm your employment but cannot tell anyone you owe money, which means they cannot contact your employer, friends or family to try to collect.
If the payday lender obtains a garnishment order, they can contact your employer to withhold money from your paycheque and direct it to the lender.
Can a payday lender take money from my bank account without my consent?
In Canada, payday lenders are generally not allowed to withdraw funds directly from your bank account without your consent or a court order. However, some payday loan agreements may include a voluntary wage assignment clause where you permit the lender to garnish your wages to repay the loan if you default. You can rescind this permission anytime if you signed such a clause with a payday lender.
Can you go to jail for a payday loan?
You cannot go to jail for defaulting on a payday loan. While payday lenders may take legal action to recover the debt, such as suing you in court, defaulting on a payday loan is not a criminal offence in Canada.
Can I delay or extend a payday loan?
Payday loans are typically short-term loans, although you may have up to 62 days to pay them back, depending on your loan agreement.
In most provinces in Canada, payday loan rollovers, also known as loan extensions or renewals, are not allowed by law. You cannot delay a payday loan by rolling it over with the same payday lender.
Some provinces in Canada have rules regarding successive payday loans. For example, if you have taken three loans within 63 days in Ontario, the payday lender must offer you an extended payment plan.
Can I take out a loan with another payday lender?
While you can’t get another payday loan from the same lender, nothing stops you from taking out a loan with another payday lender, either in person or online.
Taking out a loan with another payday lender to cover an existing debt is unwise and leads to a payday loan cycle that is difficult to break. Owing money on multiple payday loans often leads to bankruptcy.
Should I use my credit card to pay off my payday loan?
Most people who take out a payday loan have done so because they no longer have any available credit limit on their credit cards. However, credit cards charge a much lower annual interest rate than a payday loan. If you can refinance your payday loan with your credit card, paying less interest might make sense and help you repay the loan amount sooner.
Taking a cash advance on your credit card to pay off a payday loan will result in cash advance fees and increase your credit card debt. Make sure you have a repayment plan for your credit card bill so you don’t end up reborrowing from the payday loan company and end up in a payday loan cycle of debt.
Can you do debt consolidation on payday loans?
You can consolidate payday loans if you have enough good credit to qualify for a new debt consolidation loan.
Taking out a line of credit or personal loan from a bank or credit union to pay off a payday loan can be a good idea due to the lower interest rates of these types of loans.
By consolidating high-cost payday loan debt into a lower-interest loan, you can save money on interest payments, lower your monthly payment and pay off your total debt balances faster.
The key, however, is to ensure that your consolidation loan has a low interest rate and that you can afford the monthly payments. Many payday lenders now offer high-interest lines of credit. We do not recommend these loans due to the high cost of borrowing.
Another option is to talk to a credit counselling agency about doing a debt management plan. Not all payday lenders will agree to repayment through a DMP, but this is worth exploring if you only have a small amount of payday loan debt.
You can also consider filing a consumer proposal if you struggle with high payday loan debt and other unsecured debt like credit cards, lines of credit, tax debts or student loans.
Can I file bankruptcy for payday loans in Canada?
Yes, Canadians can file for bankruptcy to deal with payday loan debt. Bankruptcy is a legal process allowing individuals to discharge most of their debts, including payday loans, providing a fresh financial start.
Seeking advice from a licensed insolvency trustee can help you understand your options for debt relief regarding bankruptcy or alternative solutions such as a consumer proposal.
How to get out of payday loan debt
If you have payday loans in collection and find you can’t pay back your payday loans, you have options for payday loan debt relief.
Reach out to one of our licensed insolvency trustees for a free consultation. We will help you develop a strategy to deal with high-interest payday loan debt.
Know that you are not alone in your struggle. More than 40% of our clients have at least one payday loan, and most have multiple payday loans. (ask sharon about this) – significant instead of number.
Our team will review your financial situation, look at your budget and help you create a path towards becoming debt-free.
You can break free from the payday loan trap and regain control over your finances by exploring your options.
