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Payday Loans
Payday Loan Default
Non payment or defaulting on a payday loan is not usually a good move for a borrower...
As with any other kind of loan, defaulting on a payday loan is not usually a good move for a borrower.
However, the consequences of defaulting on a payday loan may not
be quite as disastrous for the borrower as a defaulting on a more
conventional loan. High interest rates (up to 3000 per cent APR)
are an essential part of the business
model operated by the payday loan lenders. The amount of money
generated as a result of these high interest rates allows lenders
to make allowance for a greater number of borrowers defaulting on
their loans than would be acceptable for more conventional lenders.
Rolling Over Payday Loans
Allows lenders to roll over the loans and charge extra interest...
Many loan providers are content for their borrowers not to pay off their payday loans on time, as this allows them to roll over the loans and charge extra interest on the original loan advance. This type of 'repeat business' enables many payday loan lenders to maintain the profitability of their businesses.
Credit Checks
If a borrower defaults on their payday loan repayments the lender can take civil proceedings against them...
Under normal circumstances payday loan lenders do not carry out credit checks on their borrowers as long they have their bank account details and proof of identity. On a similar basis, if a borrower is occasionally late in making repayments, many lenders will not report these payment irregularities to the credit reference agencies. This can help people with poor credit history because their credit history is not damaged any further. In many cases, borrowers may avoid data referring to payday loans appearing in their credit history at all. However, if a borrower defaults on their payday loan repayments and the lender decides to take civil proceeding against them, then all this information is likely to be added to their credit history.
Debt Collection Agencies
A lender can pass the debt on to a debt collection agency...
Because many payday loans are for relatively small amounts, taking court action against the borrower, who probably has little money in the first instance, is often not a cost effective way for a lender to try to recover their outstanding debt.
If a borrower defaults on a payday loan, the most likely course
of action for the lender is to pass the debt on to a debt
collection agency. The advantage for the lender of using a debt
collection agency is that the agency should have the staff and other
resources to chase the outstanding debt more quickly and effectively
than the payday loan lender.
The downside for the lender is that the debt collection agency will take a commission of around 10 percent of the value of the outstanding amount. From the borrower's perspective, debt collection agencies can sometimes appear threatening and might be a factor that discourages repeat business with a payday loan lender.
Consumer Credit Counselling Service
Contact the Consumer Credit Counselling Service...
For consumers who consider that they are receiving unfair treatment from a debt collection agency or payday loan lender, the Consumer Credit Counselling Service (www.cccs.co.uk) offers free, confidential advice and support regarding debt issues.