What Are Payday Loans?
A payday loan is a loan that you may take out before your payday. People usually request them if they are going through a financial hardship, and they need money to take care of a bill that cannot wait until their place of employment pays them. They are an option if you don't have any cash, do not own a credit card and have exhausted all other means, as financial expert Amanda Hash states. They can be excruciating, because you must pay them back, often with over 100-percent interest.
According to LaToya Irby, author of the Spendonlife.com article, "Do Payday Loans Cause Poor Credit?" you will either go to an online institution, or what Amanda Hash calls a brick-and-mortar, real-life bank. You will receive an application. You will also have to field a number of questions the institution will ask you, such as how much you regularly make or how much you expect to make this week. The one other item you need for this to work is a checking account. When you pay them back once you obtain your check from work, the payday service will automatically deduct the funds from your account.
How Can It Affect My Credit?
The act of requesting the loan itself has no negative or positive effect on credit whatsoever. However, as Irby points out, "Because they don't require a credit check, payday loans generally aren't included on your credit score."
When to Be Concerned
If you cannot pay your bill back on time, or if the check you have written to the payday loan agency bounces, you may be in trouble. In the event of default, as Hash states, the institution from which you borrowed may report such delinquency to the major three credit bureaus. Based on such a complaint, your credit score may go down.
Prospective lenders and landlords look at your credit score to look at your debt-to-income ratio. They use this determination to decide whether you are creditworthy. If they do not deem you trustworthy, you may be denied that car or that house you have always dreamed of.
Rewards of Paying on Time
These consequences also have a positive side. As Amanda Hash points out, if you are a good steward of your financial responses and demonstrate this with the repayment of the loan when it is due, your FICO score can go up.
Warning
Do not take out more money than you can responsibly pay back. If you know that your interest rate is 150 percent of whatever you borrow, for example, do not take out the loan if you know your check will not support paying your loan back with interest. As Irby suggests, if you make sure there is enough money to cover the payment when it is due, "you won't have to worry about whether a payday loan will affect your credit."
