Can Payday Loans Hurt My Credit Score?

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It can be very stressful when you’re hurting for cash, and a payday loan sounds like a quick fix. Many people already associate payday loans with a number of disadvantages, but if you’re in a bind and need some quick cash, it may seem like the only possibility. 

Before you run to your nearest money center, however, it’s vital that you understand all of the implications of a payday loan, including the fact that it can hurt your credit score. 

What is a Payday Loan? 

A payday loan is also known as a cash advance loan and is given to employed individuals that intend to use their paycheck to return the loan. For this reason, they are considered short-term loans and the due date will depend on when you get paid. 

Essentially, a payday loan is “borrowing” from your next expected paycheck, so you’ll be expected to pay the loan at the next date of payment. 

This means the loan terms will typically be either one week, two weeks, or a month long, since this is the frequency in which most employees are paid. 

The process of taking out a payday loan is usually quick and easy, which is another reason why people feel they may be the only option for them to make ends meet. It can be a fast way to take care of any financial emergencies that may arise. 

The money center or payday lender will verify your income so that they can confirm you’ll be able to pay back the loan at the end of the term. This can be done through direct deposit confirmation and revision of bank statements. 

They will use that bank account to deposit the funds, or if you take the loan out in a physical branch of the money center, they may give you cash payment and store the account information for withdrawal of the funds in the event that it goes unpaid. 

Upon loan approval, you’ll receive the funds and the appropriate paperwork that outlines the agreement. This normally includes a post-dated check for the total amount of the loan that you received as well as the interest on the loan. 

This will aid the lender in getting their money back from you regardless of if you pay it yourself. 

Many people who opt for payday loans have low credit or no credit at all. Because of this, the APRs on payday loans are obscenely high, and the post-dated check will serve as a type of security for the lender to recover funds. 

No matter what the reason for taking out a payday loan, they are often not the best option, even in case of an emergency. Even the Consumer Financial Protection Bureau (CFPB) has identified and explained the risk of payday loans to consumers, marking them as a sort of “debt trap.” 

In addition, many states have strict regulations to lessen the impact that payday loans could potentially cause. 

Borrowers are usually in dire or vulnerable situations when seeking a payday loan, and unfortunately payday lenders capitalize on this through very high interest rates and a cyclical loan process. 

Why Are Payday Loans Often a Bad Idea? 

There are three main reasons that a payday loan is designed to trap borrowers into a cycle of debt that they can’t get out of, including: 

High APRs 

The biggest issue for many when taking out payday loans is the inflated APRs. You may see anywhere from $15 to $30 per $100 borrowed on a payday loan. 

While it’s good that many states have limitations on what a payday lender can charge, it’s still set at a high rate. The national average APR for payday loans is $15 per $100 borrowed. That works out to be a 391% APR on a loan term of two weeks. 

For instance, imagine you borrow $400 for the two week term. At the end of your term, you’re expected to pay $460, equating to a daily interest charge of $4.29. Even the highest limit credit cards don’t come close to these rates, with high interest credit cards ranging from 11-36% APR.  

Short Term Loans 

People then get stuck into these “loan loops” because of the short-term nature of payday loans. Because the person is already borrowing from their next paycheck, unless they’ve planned ahead and have the leeway, they’ll be in the exact same situation come payday. 

For most payday loan borrowers, a few weeks isn’t enough time to come up with the money and pay the loan off for good. In fact, many money centers will ask the borrower if they’d like to re-borrow as soon as they’ve paid their loan, or it can be done online after payment. 

More Fees 

As if the APRs weren’t bad enough on payday loans, more fees can come into play that oftentimes the borrower may not be aware of.

Late Fees 

As with other types of loans and credits, the lender can charge a late fee if your payment is made after the due date, or a returned check fee if they submit the check and the payment doesn’t go through. Some may charge both. 

This depends on the state, as it is against state regulation in some areas for payday lenders to charge late fees. 

Moreover, if your bank rejects the check, they may also charge you a fee for insufficient funds or a bounced check. 

Rollover Fees 

According to the CFPB, 80% of people who take out a payday loan are unable to pay them, which means that they need to re-borrow, as we mentioned above. This is known as “rollover.” Based on what the CFPB reported, 4 out of 5 payday loans are rolled over (renewed) at the end of the term

This in itself may not have a cost, as the lender will simply renew the terms of the loan. Pointing to our earlier example, if you borrowed the $400 and were responsible for $460 and want to renew the loan, you’ll need to pay it in full, and then reborrow the full amount. 

You’ll pay $460, get $400 on the reborrow, and then be responsible for $460 on your next payday. Ultimately, that means you’ll be charged $120 for borrowing $400 over the course of a month. 

Repayment Plan Fees 

If you find yourself unable to pay back a payday loan, some lenders will offer you a repayment plan. This typically comes at a fee depending on what state regulations do or do not permit. 

State Regulations for Payday Loans 

Because payday loans are frankly predatory in nature, a number of states have intervened and set forth regulations on these types of lenders. The regulations apply to things like loan terms, fees, and lending amounts. 

In fact, all states have at least some restrictions set for payday loans, except Texas. 

Below you’ll find some examples of state regulations for payday loans: 

  • California has the lowest maximum payday loan amount. Borrowers can borrow up to $300. 
  • Oregon has the highest maximum payday loan amount. Borrowers can borrow up to $50,000. 
  • Some states base the maximum payday loan amount on the borrower’s confirmed income. For example, in Nevada, the max loan amount will be 25% of what the borrower’s gross monthly income is expected to be.  
  • Payday loans are illegal in 11 states, including Arizona, Arkansas, Connecticut, Georgia, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, and West Virginia. 

If you are considering a payday loan, it’s imperative that you first check your state’s regulations on these types of loans and lenders. You’ll be able to better understand what your rights are, how you’re protected, and what the process will be like. 

Do Payday Loans Affect Your Credit Score? 

When you inquire about taking out a payday loan and begin the process, the lender will not do a hard credit check; they will only do a soft credit check, so it won’t have any impact on your score in that regard. 

In terms of payments, if you make on-time payments for your payday loan, it may positively impact your credit score. We say may simply because many payday lenders don’t take the time to report on-time payments to credit reporting agencies. 

On the other hand, if you don’t pay your payday loan on time and have late or missing payments, it’s likely that it will negatively impact your credit score. Payday lenders will report to credit bureaus with higher probability if you don’t keep up with your payment. 

What’s more, the payday lender could potentially sell your outstanding payday loan debt to collections, which will then harm your credit score as well.  

What to Do About a Payday Loan in Collections

While it’s never fun to find yourself in this situation, if you do happen to have a payday loan in collections, it’s vital that you create a plan as soon as possible. One option is to contact the collection agency and work out an arrangement to pay the debt down at a lower cost. 

It’s more likely that you’ll get the lowest payment possible to pay down the debt if you do it in one lump sum. In order to do this, you may want to work with a credit repair service such as Cred Increase to help you negotiate down the debt and pay the agency. 

They will help you to use the best negotiation strategy, get everything in writing, and secure the best payment option for you. 

When you pay your debt through negotiation, on your credit report your debt will appear as settled as opposed to paid in full. Because a “settled” debt isn’t as good as paying in full, you’ll need to determine the best option for you and your budget. Cred Increase can help you to make the right choice and guide you in resolving this and other debt issues on your credit report. 

The negative item on your credit report can stay on your credit report for up to 7 years no matter how you pay off your collections debt, so working with a professional credit repair service can help you explore the best strategies. 

Who Can Get a Payday Loan? 

In order to get a payday loan, there are a few requirements. You may qualify for a payday loan if: 

  • You are 18 years or older 
  • Have a government-issued ID
  • Have an active bank account
  • Have proof of income, most commonly a paystub

In addition, you may be required to present a Social Security number to take out a payday loan. There are no credit score requirements for a payday loan, so that will not impact your eligibility. 

While chances of denial are slim if you provide the above, some individuals may find their payday loan request denied. For instance, if you're an active-duty military, spouse, or dependent, any lender with an APR over 36% has a legal responsibility to deny the loan request. 

Alternatives to Payday Loans

There are a range of alternatives that can help you with financial roadblocks aside from payday loans. Virtually all of them offer better terms as well. Below are five options: 

  • Personal Loans: personal loans undoubtedly offer borrowers a better APR than a payday loan, and the loan terms will be longer. If you’re worried about poor credit, you should apply at a credit bureau over a big bank since credit bureaus are more likely to lend to low-credit borrowers. 
  • Cash Advances: with the expansion of financial tools and technology, there are different cash advance apps that can offer you low or no interest advances on your coming paycheck. 

Some apps offer them at an extended period with a low service fee for immediate release of funds, and some will offer them a few days before your paycheck as a courtesy to you. In order to qualify, you’ll need to sign up, apply, and be approved. 

These services will evaluate your bank statement online and also may require direct deposit to be set up for your paycheck. Depending on your employer, you could also ask for an advance from them.  

  • Borrowing Money: If none of the above options work for you, you may consider asking someone of confidence to lend you money for a short period. 
  • Debt Settlement: If your debts are the main financial strain that is causing you to take out a payday loan, you might consider debt settlement in lieu of more credits and loans. 
  • Extended Payment Plans (EPPs): When you already have a payday loan, some payday lenders will be able to offer you an extended payment plan. Some states have mandated this as a requirement for payday lenders.  

Should You Get a Payday Loan? 

Before you take out a payday loan, we highly recommend that you explore all other avenues before making your decision. After thoughtful consideration and exploration, if a payday loan is your only option, ensure that you pay the loan back on time and as soon as possible. 

If you don’t pay your loan on time, miss payments, or get trapped in a payday loan loop, you may experience a hit to your credit or financial instability. 

Poor credit can be the biggest hindrance to taking advantage of payday loan alternatives, so it’s a good idea to consider credit repair services if you find yourself in this position. Cred Increase is a trusted provider that can assist you in reviewing your credit and help you to take care of collections, dispute false or unverified information, and create an action plan to get your credit on the rise. 

When you improve your credit, you’ll have many more financial possibilities that will benefit you in the future instead of dragging you down like payday loans do. 

By jerpy

4 Posts

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By jerpy

4 Posts


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