A payday loan is a short-term loan. Consumers take out this type of loan against an upcoming payday to cover monetary shortfalls. These loans usually have a high interest rate and must be repaid on the date the consumer receives his paycheck. If the loan isn't repaid, the consumer faces a number of serious consequences that can last for several years to come.
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Payday loans are based on the concept of postdated checks. The payday lender will try to cash that check via ACH, the Automatic Clearing House, which means that a physical check isn't presented to the bank, but instead, the amount of that check is debited from your account. By not having sufficient funds in your current account, this debit transaction is declined, your account goes negative and you will receive a fee for insufficient funds (NSF). The lender may try to send that transaction through again, creating more fees if the funds still aren't there. If you repeatedly overdraw your account, or leave it negative for an extended period of time, the bank will close it. When this happens, the bank reports you to ChexSystems, a credit agency used by banks. Negative information in ChexSystems remains for five years, and most banks will not open another current account for you if you have a record in the ChexSystems database--even if you later paid the debt off.
If you fail to repay a payday loan, the lender may hire a collection agency to collect the debt on their behalf, or they may sell the debt outright to the collection agency. Once the debt goes to a collector, the collector is allowed to add their fees to the outstanding balance, further increasing the amount of debt that you owe. They can also add a collection account to your credit report, which may negatively affect your credit score. Depending on the statute of limitations in your state, this debt can remain collectable for several years and can follow you around for a long time. Even if the first collection agency is unable to collect, they can sell it to another agency, which in turn can add a collection account to your credit report and try to collect the funds from you. As long as the debt remains unpaid, it will continue to accrue interest at the rate allowed by your state laws.
Some payday lenders may forgo turning the account over to collections and sue you outright in court to obtain a judgment, which is a legal declaration by the court that you owe the amount claimed and are responsible for it. If they obtain a judgment against you, it gives them the right to garnish your wages, seize the funds in your bank account, place a lien on your property or a combination of all three. In some states, like Florida, the owner of a judgment can collect on it for up to 20 years. This debt can literally hang over your head for decades, and will continue to accrue interest as well.
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