Not once do you come across advice to avoid a payday loan. One of the many reasons is because these are short term loans which are slightly more expensive. You take payday loans against your salary. Once you get paid, you pay the loan amount in full plus the interest rate.
One commendable thing about payday loans is that they rarely have a negative impact on your credit score. This is because you pay them in full amount as soon as you get your salary. The timely payment proves that you’re a reliable borrower.
However, taking payday loans can affect your loan reputation. Lenders will scrutinize your financial capability if you take payday loans. They might limit your borrowing and interest rates if you regularly take payday loans.
How Do Payday Loans Affect Credit History?
Many lenders will not run a credit check when you apply for a payday loan. The check must be equivalent to the borrowed amount. On D-day, your account must have the money or get a bounced check.
It means that payday loans will neither hurt nor improve your credit score if you pay on time. However, if you default, they’ll hurt your credit.
Do Payday Loans Hurt Your Credit Score?
If you apply for payday loans, the borrower may compel you to write them a postdated check equivalent to the borrowed amount. On D-day, your account must have the money or get a bounced check.
A bounced check might get your account closed and your details forwarded to loan collection agencies. The collection agencies will then report to credit bureaus. Once your details reach the credit bureaus, you won’t escape a bad credit report.
Payday loans can also make you default on other loans. You won’t finance your student loan or credit cards because the money will pay the payday loan. If you default on other loans, your credit score gets lowered.
Payday Loan Risks
Payday loans don’t get you out of a difficult financial situation. This is because you’re borrowing when you’re short of cash, and once you get paid, you use up the money to pay the loan. The circle will then continue.
The loans attract slightly high-interest rates and can hit you with high fees if you’re unable to pay on time. What’s more, interest rates are a percentage of the borrowed money and calculated every day. The longer you take to pay the loan, the higher the interest rate.
Considering all these factors, you shouldn’t take interest rates lightly, even if they’ll not impact your credit score.
Only take a payday loan if you’re sure you can afford it. If it’s something you can delay, payday loans are not worth it. Consider borrowing from friends or looking for cheaper credit alternatives if you must get urgent financial aid.
The Bottom Line
Payday loans might not affect your credit score directly. However, other factors can make it spill over to your credit report. The loans may seem great if you have bad credit, but their short term nature may worsen your financial situation.
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