Sara Routhier, Director of Outreach and Managing Editor of Features, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overw...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 27, 2013

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Yes, you can be sued for defaulting on a payday loan.

If a payday loan company lends you money then you are legally obligated to repay them. It isn’t free money after all and should be treated like any other form of debt. You must repay it in the end.

Of course, should you refuse to repay it or be unable to satisfy the debt, then the lender is within their rights to take you to court over the payday loan.

However, this process can be complicated depending on state laws and the manner in which a borrower obtained the payday loan.

For example, a borrower who obtained a payday loan online yet lives in a state in which payday lending is illegal probably doesn’t have to repay the debt, despite the lender’s protests.

This is because the lending of the loan itself was illegal. While a lender may claim that they must be repaid, and could even threaten the borrower with a pending lawsuit, these are likely to be hollow threats at best.

On the other hand, if a borrower lives in a state where payday lending is legal, and borrowed money from a lender within financing state that allows payday loans, then the borrower will be held liable for the amount owed.

If a payday lender is victorious in court then the borrower could potentially face wage garnishments, or see a freeze on his or her bank account.

These types of lawsuits are not incredibly common though. Borrowers should take some small comfort in knowing that the time, resources, cost of filing a lawsuit, and hiring of a lawyer, generally exceed the amount of most payday loans. This simply makes it illogical for lenders to pursue the matter in court since they would be spending more money than they could possibly win. As a result, many lenders simply try to negotiate a payment plan or may even try to settle the debt for a certain amount of money in order to avoid the court system.

However, should they pursue legal action and win, money isn’t the only thing at stake; a borrower’s credit score could be negatively affected as well. This could make obtaining loans in the future rather difficult.

Here is one more piece of advice for defaulting borrowers. If your lender takes you to court and wins a legal victory against you, then your state’s laws may prohibit wage garnishments or limit the amount you owe your lender. So double-check with your state’s laws before giving in to a lender’s wage garnishment request.