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What are the penalties for not repaying your loan on time?

As befits a procedure in which the loan companies possess all the power, the risks of not adhering to their rules can be extremely harsh. The first side effect of not repaying a payday loan on time is a steep increase in the amount of interest accrued on it. In some cases this interest rate can be as high as several hundred percent. If a person does not repay his loan, he will also be liable in court for civil damages, which in itself is a very expensive procedure. In America it has become standard practice for double damages to be charged - this, coupled with the fact that the lender is always in a very strong legal position, makes defaulting on a payday loan a very risky practice. The possible problems that may occur by not repaying a loan in a timely manner greatly outweigh the benefits of receiving a loan in the first place.

Persons are also liable to be arrested. More aggressive lenders threaten to contact the police with non-payers' addresses and other contact details, and even in states where this tactic is illegal, it is at least a powerful enough deterrent.

In general, the payday loan provider will begin collection processes in order to begin recovering the money owed to him. As a first step, the debt can be sold by the lenders to a third party, who then takes responsibility for the debt collection - or it can be collected by the lenders themselves. In some situations - where large sums of money are involved - the loan lender may be forced to sue an applicant in order to gain the legal authority to bring them to justice.

It is common practice for applicants who have not previously defaulted on loans to be harassed for a period of time, but it is rare for any physical action to be taken.

After the second time that a payday loan is not repaid on time, it is likely that the applicant will be found by the lending company, often at his place of work. As a last resort, a person's possessions can be claimed as payment.

Meanwhile, extremely high interest and late charges are constantly being incurred on the outstanding debt. Due to the fact that payday loan companies operate using inflated charges, it is likely that the amount of extra fees will be even greater than the amount of money that was originally borrowed. It is from this practice that the phrase "loan-sharking" appeared in everyday speech.

Another option available to payday loan providers in order to receive outstanding money owed to them is applying to the courts to have the borrower's income garnished. All income is liable to be garnered, except welfare payments. Even unemployment insurance benefits may be taken, although this can take some time.

When this happens, the payday loan lending company is within its rights to file a report with a credit rating agency, in which it will be put in writing that a person has defaulted on a loan that it was provided with by the said company. This report remains on borrowers' credit record for the duration of the time that the loan remains unpaid; when the loan is paid in full, the report is edited and the credit record is changed.