How much an unpaid payday loan can affect your credit?

Before knowing the effect of an unpaid payday loan on your credit, you need to find out what is a payday loan and how it works.

What is a payday loan?

A payday loan is a small unsecured cash loan with a short tenure. A borrower may get this loan against a post-dated personal check or his/her paystub. Legally, a borrower may get quick and easy access to up to $1500 in cash. They must pay back the loan on the next payday (as per the agreement) with the principal plus the finance charges.

The payday lender will provide the money to the borrower with a high rate of interest. The interest rate is quite high compared to other conventional loans as payday loans are very easy to get. There’s no strict rule as such like credit score, or salary scale to get approved for the payday loan.
You’ll find many payday lending storefronts in every state of U.S. Most of them have a bad reputation for being predatory. Providing credit and cash without applying strict rules is a risky and expensive operation. The majority of payday loan borrowers have bad or lower credit score or a low income. It is also notable that most of the payday loans are given for a short tenure, about 14 days on an average.

How the payday loan process works

If you need an urgent cash and wish to opt for a payday loan, you may contact a payday lending store. You may need to provide the lender your pay stubs and bank details for verification. Then the lender will hand over the cash to you. The lender may also inform you about the payment date when you should return the money either in cash or via online payments.

Payday lenders often avoid credit checking. That’s why there is no minimum limit of income requirements or high credit score limit. They only require a valid paycheck and a checking account to transfer the money after for instant (or 90-second) approval.
Getting a payday loan online also has become easier these days. All you need to do is to submit your loan application and lenders will transfer the money in your bank account. On the next payday, the loan amount + the finance charges will be credited to the lender’s account.

You must borrow from reputed and legal payday loan lenders in your state. Many online lenders do not follow state rules and practice illegal payday lending. Make sure you avoid these lenders who can really harm your finances and hurt your credit score.

How payday loans can affect your credit score?

A payday loan normally does not reflect on your credit report of TransUnion, Experian, and Equifax, the three major credit bureaus. However, in some cases, your payday loan records might be collected by special credit reporting agencies. In that case, a late or an unpaid payday loan might stay on your credit file for a period of 7 years.

So, if there is a chance of missing a loan repayment, to be on the safer side, you should always inform your lender first and see if anyway you can arrange an easier repayment option.

The lenders might consider this scenario while approving your future loan application. So, basically, this is how payday loans can affect your credit score. If you fail to repay a payday loan, it is quite possible that lender (legal) may send your file into collections. If that happens, the debt collector might report your unpaid payday loan debt to the main credit reporting agencies. Hence, your credit score gets affected by your unpaid payday loans. If you repay your payday loans on time, you might avoid such critical situation.

What if you cannot repay a payday loan?

There are two types of payday loans.

a. Legal payday loans
These payday loan lenders follow the state’s legal payday lending rules and are licensed to do money lending business.

b. Illegal payday loans
These payday loan lenders aren’t allowed to do lending business in the state as per the federal law. For example – tribal lenders and some online payday lenders.

If you have taken out a payday loan from a legal lender, it is your duty to pay off the principal amount and the total interest payable. If you don’t repay the payday loan, the lender might sell the loan to a debt collection agency. The debt collection agency may report your account in collections to the credit bureaus and that would definitely affect your credit score a lot.

But this is not the end of it, there’s more.If your payday lender or the debt collector sues you to collect the unpaid payday loan debt and you do not appear in court or you lose the case and fail to pay the judgment against you, the information will be listed on your credit report and impact your score for up to 7 years.

If you have financial issues and can’t make the payments, contact the lender and negotiate for a temporary repayment plan. If you do not contact your lender and miss your payments, the interest will keep growing. Finally, the lender might file a lawsuit against you in civil court. To get out of this mess, you may opt for a payday loan consolidation option and become debt free.

On the other hand, if you have taken out payday loans from illegal lenders, the only thing you may need to do is to pay off the principal amount. You may ignore paying the interest if you can’t afford it. Don’t worry, they can’t sue you in the court for that, they are illegal lenders, remember?
If still, these illegal members are harassing you to collect the interest, you have the right to complain against them to the state’s attorney general’s office.

How to reduce the effect of payday loans on the credit score?

  • Don’t apply for too many payday loans at a time. You should only apply for payday loans when you are certain that you need that loans urgently and you can pay it off.
  • Be careful about how often you apply for loans. Most of the lenders may suggest you wait at least three months between two consecutive applications. It’s important for you to avoid risks. So you must do all the things that are necessary to increase the chances of acceptance. Don’t wait to be rejected before trying to improve your situation. So, have patience and work accordingly.
  • Consider opting for a broker service. You can apply for multiple payday loans to different providers at once, leaving just one listing on your credit report. This also increases your chance of being accepted.