The Consumer Financial Protection Bureau (CFPB) estimates about 12 million American consumers take out payday loans annually. However, many of these borrowers end up on the wrong side of payday debt due to a limited understanding of how these loans differ from traditional credit.
We intend to help you avoid payday loan pitfalls by explaining its structure, conditions, alternatives, and the impacts of payday loans on your credit report.
What Are Payday Loans?
A payday loan is a short-term borrowing arrangement involving a cash advance to the borrower of about $500 or less. To secure the loan, the borrowers write the lender a post-dated check or give the lender electronic access to their bank account. On the agreed-upon due date, the lenders can cash the check or withdraw the full payment electronically from the borrowers' bank account for the loan balance plus the finance charge. The average loan period is around two weeks.
To qualify, you must provide proof of an open bank account in good standing, a valid ID, and payment stubs from your employer. Pay lenders usually set the loan amount based on the income level established by your pay stubs.
Many borrowers overlook the high cost of payday loans, even though some lenders can charge an average annual interest rate (APR) as high as 780%. Even the average APR of 400% for a two-week loan is far above industry standards. This APR percentage equals a finance charge of $15 per $100. By comparison, APRs for a bad credit loan with installments average half that much. Despite these better loan alternatives, many borrowers overlook them because of their urgent need for quick cash to pay a significant expense, such as a mortgage payment, car note, or medical bill.
Do Payday Loans Affect Credit?
During the payday loan approval process, lenders base your eligibility on your proof of income, banking history, and consumer reports. Your credit history and other debts don't factor in the process, meaning payday lenders typically don't do hard credit checks and spar you a credit score reduction.
It also means payday loan repayments don't affect your credit.
Do Payday Lenders Report to the Credit Bureaus?
Payday lenders generally don't report your payday loan information to the three major credit reporting bureaus. However, if you fail to repay the payday loan, your lender may sell or transfer your loan debt to a debt collection firm. As a result, the debt collector may report your delinquent debt to one or more of the major credit bureaus.
Can Payday Loans Improve Credit?
Many people with poor credit turn to easy qualifying loans for a bad credit fix. But your timely and consistent payments on your payday loan go unreported to the three major credit reporting bureaus. For this reason, your payday loan payment activity can't improve your credit like other loans can.
Can Payday Loans Hurt Credit?
Provided the lender keeps possession of your debt, your payday loan won't harm your credit. But a failure to pay can expose you to credit harm. Remember, the payback period is typically two weeks. You must pay back your loan within that tight time frame or risk the possibility of the payday lender selling your loan to a third-party collector. To persuade you to pay, the debt collector could threaten to report your debt to one of the major credit reporting bureaus.
If this happens, it could negatively impact your credit score with all three bureaus. Also, a payday lender may sue you to collect the unpaid debt. If the lender wins the lawsuit, the result could appear on your credit reports and potentially reduce your credit scores.
So, Is a Payday Loan Worth It to Help With Credit?
According to the CFPB, 80% of payday loan customers roll over their loan within 14 days of receiving it. This move means they pay double the fee for the same loan amount. What's worse, the CFPB found that over 80% of the borrowers take out one payday loan after another, leading them into a costly debt trap.
Life situations can cause many of us to run short of cash or take a hit on our credit. However, a payday loan can worsen your financial situation and negatively impact your credit score.
The good news is there are better alternatives that are more helpful in the long run and can help increase your credit score, regardless of your credit status. For example, bad credit installment loans, credit card advances, and other personal loans exist — and these loan options usually offer potentially larger loan amounts and more accommodating terms.
Making Your Choice
There was a time when payday loans and pawn shops were the only options to get quick cash for urgent expenses. Fortunately, better alternatives like the Jora bad credit loan are available to borrowers with low or no credit scores. Visit our site and apply now.