Understanding the Serious Consequences of Defaulting on a Payday Loan
Defaulting on a payday loan can have serious consequences.
A payday loan is a type of short-term loan that is meant to be paid back in 3 to 9 months at most.
Small business loans for companies with poor credit work likewise, and they offer a chance to fill a shortfall of cashflow.
These loans are often used by people who need quick cash to cover unexpected expenses, but they can be dangerous if not used responsibly.
So, what happens if you default?
Read on to find out.
The Negative Impact of Defaulting on a Payday Loan: Financial and Legal Consequences
What Does Defaulting Mean?
When you default on a payday loan, it means you have failed to make a repayment on the agreed-upon date.
This can happen for a variety of reasons, such as a lack of funds, an unexpected expense, or a change your financial situation.
What Are the First Steps?
The first thing that happens when you default on a payday loan is that your lender will contact you.
They may call or send letters.
Most payday loans are unsecured, so you won’t risk your possessions, but you may end up with large debt that is hard to pay off – it’s best to take action fast.
What About Charges?
The lender may also charge additional fees for late payments or non-payment.
These fees can quickly add up and make it even more difficult for you to pay the loan back.
The Financial Conduct Authority (FCA) capped the maximum interest for payday loan at 0.8%, but as your debt drags on, this adds up.
What About your Credit Score?
Defaulting on a payday loan can also have a negative impact on your credit score.
This can make it more difficult for you qualify for other types of loans or credit afterwards.
Of course, many people use payday loans because of existing bad credit, but making it worse won’t help either!
What Regulations Are there for Payday Loans?
It’s important to note that payday loans are regulated in the UK.
We mentioned the FCA already, but the Financial Ombudsman Service (FOS) handles complaints of unfair treatment, issuing compensation in some cases.
The Consumer Credit Act 1974 also protects you, and if the terms of the contract were not made clear, you could have room to argue.
How to Avoid Defaulting on a Payday Loan?
To avoid defaulting on a payday loan, it’s important to only borrow what you can afford to pay back.
It’s also important to understand the terms and conditions of the loan before signing the agreement, including the interest rate, fees, and due date.
It’s also important to consider alternatives to payday loans, such as borrowing from friends or family.
You could also boost your income by selling unwanted items, freelancing or taking a part-time job for a short period.
Where to Go Now?
You should contact your lender as soon as possible to try and work out a solution.
If you feel you have been treated unfairly, you can contact the Financial Ombudsman Service (FOS) to see if they can help.
If you have never taken out a payday loan, remember they are intended for short-term borrowing only.