Payday loans have become one of the most popular forms of credit in the USA, with over 12 million Americans taking out payday loans each year. This is because payday loans offer quick approval and same-day cash, even for borrowers with bad credit score or history.
Statistics suggest that between 14 to 20% of payday loan borrowers in the US fail or do not repay their payday loans. In this guide, Kallyss runs through everything you need to know about how and why Americans do not repay their payday loans.
Why Do Americans Struggle to Repay Short-Term Payday Loans?
Over half of payday loan borrowers have difficulties meeting their loan repayments. Short-term loan statistics show that 58% of users struggle when it comes to meeting their monthly expenses. Often, this is because people are borrowing money from payday lenders for the wrong reasons.
Payday loans should only be used for one-off emergencies and are never a solution to long-term financial difficulties. Despite this, the majority of payday loan users are frequent borrowers. 7 out of 10 payday loans are taken out for recurring expenses such as regular bills like rent and electricity, rather than unforeseen emergencies. Moreover, many customers in the US use payday loans inappropriately, sometimes taking out multiple payday loans using multiple lenders at the same time. As a result, American borrowers remain in debt for an average of five months out of the year.
What Is Repeat Borrowing?
Repeat borrowing is when someone borrows a payday loan then returns to seek more credit from a payday lender shortly after paying it off.
How Many Americans Are Repeat Borrowing?
- 75% of payday loan users are not first-time borrowers and have used this form of credit before.
- 80% of payday loans are taken out less than a month after borrowers finish paying off a previous payday loan.
How Many Americans Are Rolling-Over Loans?
Users often end up rolling over an outstanding loan by taking out additional credit with the same lender. Statistics show that 1 in 4 payday loans are rolled over more than nine times!
Re-borrowing and rolling over loans can create a dangerous cycle of debt. As your debt builds up, you will likely incur high fees and harm your credit score. Repeat borrowing is always damaging to your financial situation.
What Will Happen If I Do Not Repay My Payday Loan?
If you do not repay your short-term loan, you will inevitably face financial problems!
If you fail to keep up with repayments on your payday loan, the following consequences can occur:
- Follow up emails, calls, and letters from the lender
- Damage to your credit score
- Late fees and penalties
- More expensive to get credit in the future
- Issues accessing loans in the future
- Using property or guarantor’s property as collateral
Lenders can also take action to retrieve the money, such as draining your bank account, garnishing your wages, or taking you to court. You will likely incur extra bank fees for these withdrawals and see part of your pay-check withheld to pay back the lender. Therefore, it is important to not only check you can repay the payday loan but to also only use it for appropriate matters.
Could I Go to Jail for Not Repaying a Payday Loan?
No, it is extremely unlikely to face jail time for not paying back a payday loan. Although you will not go to prison, you may be taken to court by your lender. If you are summoned to court, you must turn up when required to do so. Lenders will often automatically win the case if you fail to appear.
Why Is It Important to Repay Payday Loans?
You should always fully consider whether you have any means to resolve your payday loan debt to avoid dealing with the repercussions. If you fail to meet the repayments in the agreed-upon time, your loan continues to gather extra interest, making the debt difficult to manage, which can lead to trapping you into a cycle of uncontrollable debt.
These consequences reveal how important it is only to use financial products when you can afford them. Remember that payday loans are not designed for such repeat use for long-term problems. These types of loans should only be used for emergency one-offs, such as car repairs, home repairs like broken boilers or unexpected medical bills.
What Options Do I Have If I Cannot Repay My Payday Loan?
Do not prioritize repaying your lender over basic needs such as putting food on the table or paying your rent. However, you may be eligible for a few options that could help you pay off your debt if you are struggling to make payments on time.
You may be eligible for community assistance plans for help with rent, utilities or food in states such as California and Iowa. You should also seek advice from non-profit counsellors, bankruptcy attorneys or legal aid centres as they are the experts and can give you the best advice regarding your next financial decisions.
Look for ways to find cash quickly without getting in more debt such as borrowing money from family or friends or quick jobs that can help you earn. Do not file for bankruptcy over small debt, but it is an option if you are building large amounts of unpaid debt, especially if this totals more than half of your income. Do not wait and hope that the debt goes away, as it won’t, so deal with it fast so that you can be stress-free and financially stable quicker.
Before taking out any form of credit, it’s essential to check that the loan is suited to your financial situation and that you get the appropriate help if struggling with long-term economic issues.