A payday loan is a small unsecured cash loan with a short tenure. You may get this loan against a post-dated personal check or your paystub. The eligibility criteria for taking out a payday loan is quite simple that attracts the people who need fast cash. But this convenience with a price of hefty interest payments.
A study by the Consumer Financial Protection Bureau (CFPB) has revealed that four out of five payday loans are rolled over or renewed. Thereby, most of the people who take out payday loans fall prey to the debt trap.
Can a payday loan affect your credit score?
Usually, payday lenders don’t do a hard inquiry on your credit report. So, you don’t need to have a credit score to qualify for taking out a payday loan.
That’s why a payday loan does not reflect on your credit report of the three major credit bureaus in our country (Equifax, Experian, and TransUnion). If you repay your payday loan on time, it won’t help your credit score to increase. However, if you have unpaid payday loans, it can drop your credit score.
When can a payday loan affect your credit score?
If you fail to repay your payday loans on time, your lenders can sell off your debts to a collection agency. Most of the collection agencies furnish information to the credit reporting bureaus.
So, if your payday loan debts go to collections, the bad debts are likely going to show up in your credit report. And eventually, it will drop your credit score. Besides, it will stay on your credit report for up to 7 years.
So, if there is a chance of missing a loan repayment, you should talk to your lender first and see if you can find a way out to escape from the grasp of a payday loan.
So, it’s always advisable to pay off your payday loans on time to avoid such critical consequences.
How to reduce the effect of payday loans on the credit score?
Well, we all are concerned about our credit scores as it depicts our creditworthiness. So, if you have an unpaid payday loan, you must be worried about its effect on your credit score.
First, it’s highly advisable to stay away from payday loans as much as possible. Still, if you want to take out payday loans, I would suggest you not apply for too many payday loans at a time. Or, don’t take out a payday loan to repay another one. Otherwise, you might fall prey to the debt trap. Eventually, you might fall behind on your debt payments and your lenders can sell off those debts to a collection agency.
So, try to take out a payday loan that you can afford to repay in full and within the due date. Thereby, you can avoid the adverse effect of payday loans on your credit score.
If you can’t repay on time, you can try to settle payday loan debt on your own and get out of the situation. But don’t let your short-term loans result in long-term painful situations like getting sued or affecting your credit score for non-payment of debts.
What if you cannot repay a payday loan?
Before we discuss the consequences of not repaying your payday loans, it’s important to know about your lenders first.
1. Legal payday lenders
These payday loan lenders are licensed to do money lending business in your state and are likely going to follow your state’s legal payday lending rules and regulations. If you have taken out a payday loan from a legal lender, you will have to pay off the principal amount along with the total interest payable.
If you don’t repay it, the lender might sell the loan to a debt collection agency which may report your account in collections to the credit bureaus and that would affect your credit score a lot.
Besides, the lender might file a lawsuit against you for garnishing your wages. If the judgment goes against you, the lenders can proceed with your wage garnishment to recover the outstanding debt amounts.
So, if you can’t repay a legal payday loan, I would advise you to consult a genuine debt relief company to get instant relief.
2. Illegal payday lenders
These payday loan lenders are NOT allowed to do lending business in the state as per federal law. For example, tribal lenders and some online payday lenders.
So, you need to pay off the principal amount only to get out of the illegal payday loans. You are not legally bound to make any interest payments. They can’t sue you in court for non-payment of debts.
Still, if the illegal lenders are harassing you to collect the interest, you have the right to complain against them to the state’s attorney general’s office.
So, the bottom line is, payday loans can adversely affect your credit score if not paid on time. The bitter truth is that incessantly high-interest rates and other charges make it cumbersome to get rid of the payday loans on time. So, if you have unpaid payday loans, it’s better to opt for professional help to get out of the debt trap with ease.
Lastly, if you want to take out a payday loan, think twice before opting for it. You can look for better alternatives to payday loans and avoid falling prey to loan sharks.