We’ve all been there. You do everything right and still, sometimes, your money just doesn’t stretch far enough. Your car breaks down, you get an unexpected bill, and all of a sudden you’re struggling to find the money for it all. It’s a tale as old as time.
Except now, there are alternatives. There are credit cards, debt management programs, personal loans, and online lending. And there are also payday loans.
Payday loans can be a useful way for you to sort out your personal finances over a short period of time, and be rid of your debt within two weeks.
However, as with most personal finance loans, there is a lot to consider. Is it worth it? How much would I be paying in interest rates? And finally, what will taking out this sort of loan do to my credit score and my future credit investments?
What are Payday Loans?
Payday loans are a special line of credit that allows you to get a cash advance on your next paycheck when you have an urgent expense you’re not able to cover before you get paid. This means that you can walk into a payday loan office, get enough cash to pay for your needs, and pay them back immediately as soon as you get your next paycheck.
Here is all you need in order to take out a payday loan:
- To be over 18 years of age
- Identification (ID, driver’s license, or passport)
- A recent pay stub
- A bank account number
As you can see, receiving a payday loan is a fairly easy process. A lot of companies will also process your loan within just a few business days. At Payday Loans Pro, you can even get your payday loan processed within the same business day.
To pay back your loan, all you need is to either post-date a personal check for the date of your next paycheck (typically in two weeks’ time) or you can give the company permission to automatically withdraw it from your bank account.
Now, there are certain downsides to taking out a payday loan. Payday loans have some of the highest interest rates in the market for personal finance. Here is a breakdown of the rates your other alternatives offer:
- Credit cards (15%-30%)
- Debt management programs (8%-10%)
- Personal loans (14%-35%)
- Online lending (10%-35%).
These numbers are calculated through something called an APR, or an annual percentage rate. It refers to the annual rate of interest that is charged to borrowers. It provides the most accurate way to compare different credit options.
A payday loan carries an average annual percentage rate of 391%. If you have to default on your payday loan for another two weeks or longer, your interest rate can increase to up to 521%.
This means that with Payday Loans Pro if you are looking for a $100 loan, your interest rate would be $15. At the end of your two weeks, you will need to pay back the original $100 as well as the $15 fee, making your total amount $115. If you default for another two weeks, $15 more will be added to your previous total, making your amount 130$ instead. This will keep increasing the more you “rollover” (default on) your loan.
- Credit scores are official reports that show how good or bad your credit is.
What is a Credit Score?
Your credit score refers to the numerical group that indicates to lenders how likely you are to pay back or default on a loan. There are several things that dictate what your credit score will look like, and although a lot of the process is secret, here is what we know affects it:
- Maintaining a healthy credit card balance
- Making your payments on-time
- Limiting hard credit checks
- Keeping your lines of credit open (not closing down credit card accounts too soon)
- Being careful with debt consolidation (meaning you shouldn’t take out a singular loan in order to consolidate different types of debt you might have)
- Diversifying your credit profile (keeping and paying off different types of credit, such as car payments and student loans, allow lenders to see that you are a trusted borrower)
You should be able to request your credit score from your bank or financial institution. If they do not provide you with one, you are able to request your annual credit score from one of the three national credit bureaus (TransUnion, Experian, and Equifax).
Here is a breakdown of what your credit score could look like:
- 300 – 579 is considered a poor credit score
- 580 – 669 is a fair credit score
- 670 – 739 is a good credit score
- 740 – 799 is a very good credit score
- 800 – 850 is an excellent credit score
Most lenders will approve anyone with a credit score of over 600. If your score happens to be lower than 600, you might have a little more trouble finding a company that will allow you to take out a payday loan.
How Do Payday Loans Affect Your Credit Score?
Requesting a payday loan can sometimes affect your credit score, as some payday loan companies will run hard credit checks, which often have a negative impact on your credit. However, Payday Loans Pro does not run hard credit checks, leaving you with a perfectly unchanged credit score.
But what about when you actually get your payday loan? Well, since most payday loan companies do not actually report to the three national credit bureaus mentioned above (TransUnion, Experian, and Equifax), they tend to not affect your credit score at all.
This is only if you are able to pay back your loan in time. If you default on your loan and your check bounces, and you fail to repay the bounced check, your financial institution can close your account and send it to a debt collection agency. They will in turn report to the credit bureaus. Payday lenders also often use collection agencies so not paying back your loans could very negatively impact your credit score.
The bottom line is although a payday loan won’t do anything to increase your credit score, it can very easily decrease it. So it is important to be an informed borrower and most importantly, it is important to be a responsible borrower.