It's the end of the month and you're short on rent. You've been meaning to pick up a few extra shifts at work, but your schedule just hasn't allowed it.
In a moment of desperation, you decide to take out a Pay Day Loan.
But as you hand over your information, you realise you have no idea how this will affect your credit rating.
Will it go up? Down? Will it even show up on your credit report at all?
The truth is, there's no easy answer.
So before you decide in getting a loan until your next pay day, let's understand how pay day loans can affect your credit rating and offer some tips for keeping your credit rating intact.
What are pay day loans and how do they work?
A pay day loan is a type of short-term borrowing where you borrow against your next paycheck.
In other words, you're using your future earnings as collateral for a loan.
Pay day loans are typically small loans, ranging from $100 to $500, and can be used for emergency expenses like car repairs or utility bills.
The terms of the loan are usually two to four weeks, with the borrower agreeing to pay back the full amount plus interest and fees on their next pay day.
How do pay day loans affect your credit rating?
Pay day loans can have both positive and negative effects on your credit rating.
If you manage to make all of your payments on time and in full, then a pay day loan can actually help improve your credit rating.
This is because making timely payments is one of the key factors that credit agencies look at when determining your credit score.
On the other hand, if you miss even one payment or default on the loan, then your credit score will take a hit.
In addition, taking out multiple pay day loans can also lead to “credit invisibility.”
This is when lenders stop reporting information about your loans to the credit bureaus.
As a result, your positive payment history will no longer be taken into account when calculating your credit score.
Tips for keeping your credit rating intact
So what's the best way to avoid damaging your credit rating with a pay day loan?
Here are a few tips:
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Only take out a pay day loan if you're confident you can repay it on time.
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If possible, try to find other sources of funding before resorting to a pay day loan.
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If you do need to take out a pay day loan, make sure to shop around and compare rates from different lenders.
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Most importantly, always remember to make your payments on time!
By following these tips, you can avoid damaging your credit rating with a pay day loan.
What are the risks of taking out a pay day loan?
If you're considering taking out a pay day loan, it's important to be aware of the potential risks.
High-interest rates and fees
Pay day loans typically come with high-interest rates and fees, which can make them very expensive.
Short repayment period
The short repayment period of most pay day loans can make it difficult to repay the loan on time.
Renewal fees
If you need to renew or extend your loan, you may be charged additional fees.
Rollover debt
If you can't repay your loan when it's due, you may be able to “rollover” the debt into a new loan. However, this will only add to the cost of the loan and can lead to a cycle of debt.
Alternatives to pay day loans
There are many alternatives to pay day loans that may be more suitable for your needs.
Personal loans from a bank or credit union
Personal loans from a bank or credit union may have lower interest rates and fees than pay day loans.
Credit cards
If you have good credit, you may be able to use a credit card to cover your expenses.
Family and friends
Borrowing money from family or friends is often cheaper than taking out a loan.
Savings
If you have the ability to save up, you may be able to avoid borrowing money altogether.
By considering all of your options, you can make the best decision for your financial needs.
Conclusion
In short, yes – Pay Day Loans can affect your credit rating. However, there are ways to minimise the damage by being mindful of how you take out and repay your loan.
By making timely payments and shopping around for the best rates, you can keep your credit score intact while getting the financial help you need.
Do you have any experience with Pay Day Loans? Share your story in the comments below!
