What Happens If You Default On Your Payday Loan?

Payday loans in Singapore, often offered by licensed moneylenders, provide swift funds but come with significant interest. Understanding the repercussions of defaulting on these short-term, high-cost borrowings is essential for borrowers in the Lion City.

Payday loans are short-term, high-interest loans designed to provide quick funds to cover expenses until your next salary arrives. While they can seem like a convenient solution for immediate cash needs, failing to repay them as agreed can quickly lead to escalating late fees, additional charges from the lender, and persistent debt collection efforts for borrowers in Singapore.

If you fail to repay your payday loan in Singapore by the due date, here's what you can typically expect:

Fees will likely be charged

Similar to if you can’t pay your credit card bill, failing to repay your payday loan will likely result in late payment fees levied by the moneylender. These extra charges add to your existing debt, making it more challenging to clear the outstanding amount.

In Singapore, unpaid interest on payday loans can also compound over time. This means that the longer the loan remains unpaid, the more interest accrues on the principal and the unpaid interest, significantly increasing your overall debt.

If you've authorised direct debit for repayments and your account lacks sufficient funds, attempted withdrawals can also lead to bank overdraft fees. These charges from your bank further compound your financial strain.

You may experience collection calls

If you default on your payday loan in Singapore, the licensed moneylender will likely initiate debt collection efforts. These attempts to recover the owed sum can involve frequent calls and letters, causing significant stress and anxiety. 

Should your payday loan debt be passed on to a debt collection agency, you can anticipate more assertive and potentially persistent recovery tactics. These agencies may also add their own fees to the outstanding balance.

>> Read: A guide to bankruptcy in Singapore (and 3 lessons to learn)

You may experience collection calls

In Singapore, if you fail to repay your payday loan, the licensed moneylender has the legal recourse to pursue a claim against you in court. A successful lawsuit can result in a court judgment ordering you to repay the debt.

A court order obtained by the lender in Singapore due to unpaid payday loan debt can lead to wage garnishment. This means your employer may be legally required to deduct a portion of your salary to satisfy the outstanding debt.

Additionally, depending on the court judgment, if you have significant assets, the lender may be able to pursue the seizure and sale of these assets to recover the amount owed on the defaulted payday loan.

You may experience a credit score drop

In Singapore, while not all payday lenders may directly report to major credit bureaus, if your debt is passed to a collection agency, this default can be recorded. This negative reporting can significantly harm your credit rating.

A damaged credit score in Singapore has far-reaching consequences beyond just payday loans. It can negatively affect your ability to secure future loans, such as personal loans or even mortgages, and may also lead to higher interest rates on any credit you do obtain.

>> Read: How to build your credit score in Singapore

If you're facing difficulties in repaying your payday loan, know that you have options to explore before the situation escalates. Taking proactive steps is essential to mitigate the potential financial fallout. These steps include:

Requesting for an extension

If you're struggling to meet your payday loan repayment deadline, your initial step should be to directly communicate with the licensed moneylender. Openly discuss your financial difficulties and inquire about the possibility of extending the loan term.

However, before agreeing to a loan extension, carefully review and fully understand all the associated terms and conditions. Be aware of any potential additional fees, changes in interest rates or new repayment schedules that will apply under the extended agreement.

If the lender agrees to an extension, ensure you obtain a formal, written agreement outlining the new repayment terms, any revised fees and the extended loan duration. This documentation will protect you and provide clarity on the updated obligations.

Negotiating your debt with a payday lender

If full repayment of your payday loan isn't feasible, consider proposing a debt settlement to the licensed moneylender. This involves offering a reduced lump-sum payment to clear the outstanding balance. Lenders may be willing to negotiate, especially if they foresee difficulty in recovering the full amount. Ensure any settlement agreement is documented clearly in writing.

Additionally, engage in open communication with your payday lender to explore the possibility of establishing an alternative repayment plan. Explain your current financial situation and work collaboratively to create a payment schedule that is more manageable for you, potentially involving smaller, more frequent installments over a longer period.

Seeking professional help

If you're feeling overwhelmed by your payday loan debt, or if you’ve borrowed money from an unlicensed moneylender, seeking professional help can provide invaluable support and direction. Financial advisors and credit counseling agencies offer personalised guidance to assess your situation and explore available options. They can also help you understand debt management programmes in Singapore, which provide structured assistance in effectively managing and repaying your outstanding debts. 

Exploring alternative ways to get the money

If you need funds to settle a payday loan in Singapore, explore alternative borrowing options with more favourable terms by considering personal loans from reputable banks, credit cooperatives, which often offer lower interest rates and longer repayment periods, or even loans from family members.

To generate immediate funds, look for opportunities to sell unused household items or electronics through online marketplaces or consignment shops. Additionally, consider boosting your income temporarily by exploring part-time work or freelance opportunities in Singapore to help manage your debt effectively.

>> Read: What can debt collectors in Singapore do

In Singapore, it’s critical to differentiate between licensed moneylenders offering payday loans and illegal moneylenders, commonly known as loan sharks. Engaging with unlicensed lenders is strictly against the law and can expose individuals to severe legal repercussions, including hefty fines and imprisonment. These illegal operators often employ predatory tactics and charge exorbitant interest rates far exceeding legal limits.

While defaulting on a payday loan from a licensed moneylender in Singapore is not a criminal offense in itself, it's crucial to understand the legal ramifications of ignoring court orders related to debt recovery. If a lender pursues legal action and obtains a court judgment against you, failure to comply with the court's directives can lead to further legal consequences, potentially including the issuance of arrest warrants for contempt of court. Therefore, it's vital to address any legal summons seriously and seek appropriate legal advice.