When you think of taking a payday loan, you may have certain questions before going ahead with it since the concept is fairly new compared to traditional ones. Not all of us know enough about them to want to take the risk of applying for them, even if we’re in dire monetary need.
Before answering the question about whether or not it can affect your credit rating, let’s see why it is beneficial to apply for one and why not.
- Payday loans are a means of receiving quick funds. If you need cash to deal with an emergency, you know that a traditional loan can take a while to receive. From travel time to paperwork to their lengthy approval procedures, they can take a while for you to receive and can really cause a delay in helping you deal with your emergency. Since payday loans can be applied for online and involves no running around, no faxing no paperwork and no time consuming approval procedures, they can benefit you in a time of immediate financial requirement.
- They are easy to access. As mentioned earlier, apart from being available at brick and mortar lenders, payday loans can also be found online. This makes it easy to access and doesn’t require you to take out time from your daily schedule in order to apply during “opening hours”. With payday loans online, you can avoid that hassle since they are available 24×7.
- Most of them do not conduct hard credit checks which make it easier for you to get a loan. If you have bad credit, applying for a payday loan can actually help fund you. Traditional lenders usually avoid providing loans to borrowers with a poor financial past, which is not the case with payday lenders.
- Payday loan lenders will not ask you to provide collateral, unlike conventional lenders. Even if you have a faulty credit score, you do not have to worry about providing security of any kind to a payday lender and the chances of you getting funded will still be high.
The only drawback that a payday loan has is that the rates of interest of most of them are higher than those of traditional ones. So if you think that you can repay your loan without too much trouble while taking their PRs into consideration, they are definitely a good idea to go forward with.
Now coming to your question: Do payday loans Affect Credit Scores?
There are two main answers to this-
- Let’s take a hypothetical situation into consideration: You need about a thousand dollars and decide to visit a bank even though your credit rating is below 600 which makes it less likely for you to receive funds from them. The bank conducts a hard credit check on you in order to be sure about your ability to repay; and find out that your financial history indicates that you haven’t being paying back your dues on time. They then take a call about whether to provide you a loan or not and decide not to. Not only have you wasted time in this scenario, but have unfortunately also lost about 5 credit points which can make it difficult for you to avail a loan in the future.
You then approach a payday loan lender and realize that not only have you not lost more credit points since they did not conduct any hard credit checks, but have also been approved.
This means that irrespective of whether or not you receive funds, you don’t have to worry about losing credit points when you apply. Applying for a payday loan does not affect your credit score.
- What happens after you receive funds? This again has two possibilities:
- It can improve your credit score: If you repay your loan on time or beforehand, it can lead to an improvement in your credit rating. Many individuals who have faulty repayment histories choose to apply for payday loans in order to get to the “good side” of the credit score bar, once they feel that they’re in a position to afford such loans.
- It can hamper your credit score: If you fail to repay your loan on time (by asking for a rollover or an extension), or end up not repaying it at all, then you can lose credit points- like in every other loan repayment situation. In every debt related scenario, be it with a traditional or a payday lender, your repayment status will be updated thus affecting your credit score for the better or the worse.
Whether or not your credit rating is affected by taking a payday loan depend on the situation. It is however, always advised that you take one only if you’re confident about being able to repay it so that you don’t have to face any kind of difficulty when availing a loan in the future.