How Payday Loans can Affect Your Credit?

Payday loans can hurt the borrower’s credit under certain circumstances:

1. Credit Inquiries: The lender may perform a soft or hard inquiry on a credit report when a person applies for a payday loan. Such inquiries can have a minor negative impact and multiple hard inquiries within a short period may reflect financial distress to future creditors.

2. Credit Reporting: Payday lenders may report repayment behavior to credit bureaus. Repayment of the loan on time may not positively impact credit score, but on being a defaultor if the lender sells debt to a collection agency, it can have a negative impact on credit.

3. Collection Accounts: On being a defaulter, the lender may send a debt to a collection agency. Collection accounts hamper the credit score and can remain on a credit report for seven years, even if the debts are paid off later.

4. Credit Score Impact: The high cost associated with payday loans and a debt cycle can make it more difficult to come out of these financial obligations. This can result in a lower credit score over time.

5. Loan Rollovers: A continuous rollover of a payday loan by paying only the fees and not the principal amount, can lead to a cycle of debt. This ongoing financial strain can negatively impact your creditworthiness.

A payday loan is a short-term loan generally associated with high interest and is typically due on the borrower’s next payday. Here, payday means the day on which an employee receives compensation for the work performed by them during the specified pay period. These loans are also known as cash advances, paycheck advances, or payday advances. Payday loans are often looked at by individuals who need urgent access to funds to cover unexpected expenses and this is a reason why payday loans are offered at higher interest rates. The principal amount of the loan depends on the income of the borrower. The amount offered for a loan is usually equal to a part of an upcoming paycheck of the borrower.

Geeky Takeaways:

• A payday loan is a high-cost, short-term loan taken by a borrower to meet emergencies or uncertain expenses.
• The principal amount of the loan depends on the amount of the upcoming paycheck of the borrower.
• A payday loan is offered by financial institutions known as Payday Lenders.
• A payday loan is highly risky and an individual shall carefully review the terms and conditions, including the interest rates and fees associated with the loan.