How Payday Loans Can Affect Your Credit Score

How Payday Loans Can Affect Your Credit Score

It almost sounds too good to be true: thousands cash in hand without hardly asking questions. It’s what payday lenders do, aiming for a quick turnaround. But you have to beware to not get in over your head. These payday lenders have a higher risk threshold, offering loans to people with less than perfect credit history, but with that come risks, high interest rates and a negative impact on your credit score.

RISKS

If you apply for a car loan the application fee is often a few hundred dollars or a small percentage of the total amount borrowed. With payday lenders however, that percentage fee can be up to 20%. Do the math: on a $2000 loan just those fees are $400, that need to be paid back as well. A large sum for a small amount. Then you’re hit with account-keeping fees, which make it even longer to repay your loan. For a loan of more than $2000 payday lenders can charge you a 48% interest rate p.a., which can really start adding up.

​IMPACT

If your credit history is already less-than-perfect, then you might think that payday loans are the only option still available to you. Unfortunately, payday loans are a lose-lose situation, because they cause a domino effect of not having a strong savings history: not a good sign to lenders in the future. Even if you make sure to pay off your payday loan on time some other lenders can look at your credit score negatively. Not even doing anything wrong but just by having a payday loan it can be more challenging to get other finance or not make you eligible for a good interest rate. 

Secondly, if you are declined for a payday loan, it might suggest deeper issues with your credit history that you should resolve before committing yourself to another financial product. You might be declined for a payday loan if you’ve had two payday loans in the last 90 days, or you’ve simply stretched yourself too thin financially; and while it’s not good to be declined from any finance provider, a declined application from a payday lender is considered more serious on your credit history than a declined application from somewhere like a bank due to payday lenders more relaxed lending criteria.

FINE PRINT

So there are the high establishment fees, a one off fee of 20% maximum of the amount borrowed and payday lenders can charge a maintenance or account-keeping fee up to 4% of the total amount borrowed which may not seem like much, but the longer you have an outstanding balance with them it begins to add up.

Looking for an alternative to pay day loans is the better option. You may be eligible for the No Interest Loan Scheme (NILS) for essentials like car repairs.