If you don’t have the best credit and are having trouble getting approved for a credit card or loan to supplement your finances, then you may be considering getting a payday loan. Unfortunately, payday loans may not be the solution.
While payday loans typically have very minimal borrowing requirements, they do come with a bunch of downsides. For one, they have high-interest rates, which can make repaying them harder and can more easily lead to delinquencies.
What Is A Payday Loan?
A payday loan works similarly to a personal loan- taking out one of these loans allows you to receive a lump sum of money, which you can use to pay for virtually anything. Sadly, that’s where the similarities end.
Instead of borrowing money from a bank for a personal loan, you borrow money from a payday lender to get a payday loan. Payday lenders generally won’t check your credit, but this may not be a good thing.
Payday Loans Are Expensive
Despite being more accessible to most borrowers, payday loans are often tools by predatory lenders. One of the biggest ways payday lenders take advantage of desperate borrowers is through the interest rate and fees.
Your credit is what traditional lenders like banks use to determine your risk potential as a borrower. But because payday lenders don’t check your credit, they charge much higher rates and fees- to compensate for the risk of lending you money.
Interest rates on payday loans can easily be as high as 400% and fees can be as high as $15 for every $100 you borrow. In contrast, the average interest rate on a personal loan ranges between 4% to 36%, depending on your financial and credit situation.
Payday Lenders Make It Hard For You To Repay
Most personal loan lenders allow you to borrow anywhere between $1,000 to $50,000. If you have excellent credit and a respectable financial situation, this can increase to up to $100,000.
Payday loans, on the other hand, are general small-amount loans, which usually cap out at $500 to $1,000. While the smaller amount may make you think paying back a payday loan is more manageable, you may want to think again.
Banks and other traditional lenders will usually give you 3 to 7 years to repay a personal loan. A payday lender, however, expects you to refund the amount you borrowed in full within 2 weeks, plus interest and any associate fees.
Since many desperate borrowers won’t be able to repay the payday loan within this time frame, most often take out another payday loan to cover the first one, which can lead to a vicious cycle of debt.
What Happens When You Default On A Payday Loan?
It’s very easy to get a payday loan. However, because this financing option is very expensive, it’s also very easy to default on your payments. Unfortunately, defaulting on a payday loan can significantly hurt your credit.
Payday lenders generally don’t report to the credit bureaus. In other words, your payday loan won’t show up on your credit report and is unlikely to impact your credit. However, this changes when you default on your payments.
When you default on your payday loan, the lender may decide to send your account to a collections agency. Once your debt is in the hands of a collection agency, the loan will now appear on your credit report as an “account in collections”.
Collection accounts are one of the worst entries you can have on your credit file. What’s worse is the fact that they stay on your credit report for up to 7 years and will continue to affect your credit for as long as it remains there.
Should You Get A Payday Loan?
Although payday loans do come with their fair share of very unappealing downsides, it does come with a few benefits too. For one, they’re an option to get some fast cash if traditional financing isn’t available to you.
If you’re able to pay back your payday loan despite the tight repayment window and the steep interest and fees, it can help you build credit. True, some payday lenders don’t send reports until you default, but some do.
Making on-time payments is one of(if not) the best ways to improve your credit standing. This is considering that your history of making payments is the most important factor affecting your credit.
The Bottom Line
Yes, a payday loan can hurt your credit if you default. But that’s true for any form of financing. Fortunately, despite their many downsides, your credit can still benefit from a payday loan- especially if one allows you to build a positive payment history.
If, however, you’re not keen on taking on the risks associated with a payday loan, then you may want to improve your credit. This is in order to qualify for more traditional options like a personal loan.
Enter credit restoration. Call us at 888-799-7267 to schedule a Free Credit Consultation.
