Before you apply for any loan, you need to understand how it will affect your credit rating in the long run. Keep in mind that even the smallest change in your credit report can significantly impact your future financial life.
If you already have a bad credit score, you may find it difficult to obtain a low-interest loan to finance a large purchase. You may also be forced to pay high insurance premiums, and you may even find it difficult to get a job or rent an apartment.
To avoid such consequences, you need to be cautious when applying for loans. One of the common types of loans, especially for salaried people, is the payday loan. So, if your among those who fancy applying for a payday loan, you may be wondering if it affects your credit score.
We are here to help you understand everything you need to know about payday loans and how they affect your credit rating.
Understanding the True Nature of Payday Loans
Before discussing the impact of payday loans on your credit score, you need to understand what we are talking about and how it works.
Basically, a payday loan is a short-term unsecured loan borrowed against a post-dated paystub or personal check. In this case, the borrower gets access to borrowed funds after agreeing with the lender that he/she will pay the loan amount plus accrued interest on the next payday.
Typically, payday loans attract relatively high-interest rates compared to other types of loans because they are instant and convenient. In fact, most lenders process payday loans within the same day as long as the borrower provides the necessary information on time.
Does a Payday Loan Directly Impact Your Credit Score?
Applying for a payday loan may not directly affect your credit score because most lenders don’t run a background credit check. Similarly, repaying the borrowed amount on time won’t improve your score since most lenders don’t report to national credit bureaus.
That means, if you had agreed to repay the loan in three weeks and you do so in a week, it won’t help or hurt your score in any way. But things may change if you fail to repay the loan on time because the lender can decide to report you, which will hurt your rating.
How Does It Happen?
Most payday loan lenders will request you to write a postdated check to be cashed on your next payday. If the lenders go to cash the check on the agreed date and there is no money in your account on that day, the result will be a bounced check.
If you do not find means of paying the bounced check within the shortest time possible, your bank could close your account and forward your details to a collection agency which may report you to a credit bureau.
The lender may also forward your details to a collection agency if you fail to repay the loan on time. If the collection agency forwards the details to a credit bureau, it could negatively affect your credit score.
In a worst-case scenario, the lender may file a lawsuit against you, and if you fail to attend your court date, you will automatically lose the case and your details forwarded to all credit bureaus. This will negatively affect your credit rating, and the case could stay on your credit report for up to seven years!