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.
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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
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Do payday loans show up on a credit report?
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Can payday loan lenders take you to court in Canada?
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Can payday loans contact your employer?
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Can a payday lender take money from my bank account without my consent?
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Can you go to jail for a payday loan?
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Can I delay or extend a payday loan?
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Can I take out a loan with another payday lender?
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Should I use my credit card to pay off my payday loan?
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Can you do debt consolidation on payday loans?
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Can I file bankruptcy for payday loans in Canada?
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 including:
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. Our caring, professional 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.