Taking a payday loan and the fear of failing to repay the loan often leaves a common concern among borrowers about “will it hurt your credit report?” Though this is not uncommon, that credit score is a big factor in both future loans.
For any traditional lending, if you miss payments or default, it can severely damage your credit score and make it hard to continue credit-related activities. But what about the payday loan? Do payday loans show up on the credit report?
The truth is, payday loans don’t always show up on your credit report unless it go into default or collections.
Keep reading to learn many more unknown facts and make an informed decision.
What Is A Credit Report?
A credit report is a detailed report equipping the borrower’s credit history, borrowing, and repayment behavior. Typically, the report includes all the key details related to the credit history, such as credit cards, loans, and other types of credit.
A few reputable credit reporting agencies, such as Equifax, Experian, and TransUnion. asses and complies the credit report. The information assembled in the credit report is an important aspect for the lender to approve the loan application.
Based on credit history, they define if the applicant is the right one to go with the loan processing and set up the interest rates. Along with the amount of debt owed, your report will have any public records that might indicate financial trouble. This could be bankruptcies or foreclosures.
Through the information from the report, a specific credit score is calculated. It is the numerical presentation of a single number that summarizes your credit risk.. The score typically ranges from 300 to 850. However, maintaining a good credit report is important to ensure the credit score remains high and there will be no trouble in securing loans with favorable terms.
How Do Scores On Credit Reports Work?
A credit score is an important tool for the lender to evaluate whether the individual is eligible for the loan and that the borrower will repay the loan. Based on the information and history in the credit report, the credit score is set from 300 to 850. The two most commonly used score models are FICO and VantageScore, which evaluate several important factors before scoring the credit.
These include:
- Payment history
- The amounts owed
- Length of credit history
- Types of credit used
- New credit inquiries
The information in the credit report has a high impact on how lenders assess loan applications. For example, a strong payment history with no missed payments typically results in a high credit score.
On the contrary, if you frequently miss the repayment date, it lowers the score. A high credit score is a good sign that offers lower interest rates and better loan conditions as lenders find them less risky. Besides, for the lower credit score, it can seem hard to even get approved for the loan application.
Does A Payday Loan Show On A Credit Report?
Yes, payday loans and the history that you have with payday lending will appear on your credit report. Though payday lenders don’t always report to the major credit bureaus, they often do when you default on the loan repayment.
This means if you fail to repay the loan installments on the due dates, it can be reported by the collection agency. And when the payday loan is reported with so much default history due to non-repayment, it is no wonder it highly negative impact on the credit report for any future loan processing.
Such a bad credit report can result in hurdles in obtaining any future loans, credit cards, or mortgages. All the defaults on the loan or missed repayment stay on the report for about six years and negatively affect your ability to get credit.
How Does a Payday Loan Affect Your Credit Score?
A payday loan typically doesn’t affect your credit score if you ensure the on-time repayment of the loan. In such a case, the payday lenders do not report to the major credit bureaus. The major effects on the credit score occur when you fail to repay the payday loan.
Though it is not reported directly to credit bureaus, it is often sent to collections due to non-payment and reported by the collection agency. Your loans are then transferred or noted as the “collection” account, which severely damages your credit score.
In case your loan processing ends up with the collections titles, it results in long-term consequences for your credit score. You may come on the row of higher-risk borrowers. Which just makes it difficult to get future credit, mortgages, or loans.
Though you can get a payday loan even in the future, as the payday lender typically doesn’t go through a hard credit check, it may end up with higher interest rates. The cost of borrowing will increase over time.
What Are The Associated Risks For Payday Lending?
Though a payday loan is embraced with unlimited blessings to deal the financial emergencies, it is not without risks. Here are some major considerations you need to know before your next payday loan application:
High Interest Rates
Payday loans mostly come with extremely high-interest rates, which most often reach up to 400% APR. Such a big amount often creates difficulties for some borrowers to repay the loan on time, which just results in a cycle of debt. According to the Consumer Financial Protection Bureau (CFPB), many payday loans carry an APR over 300%.
Debt Cycle
Most of the borrowers often find themselves in hurdles to repay payday loans in full on the due date. To avoid the concern of non-repayment, most consider the rollovers or additional loans to cover the original loan. CFPB reports that four out of five payday loans are rolled over or covered by another payday loan within 14-30 days. Instead of solving the problem, it often accelerates the debt issues.
Credit Damage
In case payday loans go unpaid and are sent to collections multiple times, payday lenders report to credit bureaus, which often damages the borrower’s credit score. It’s not only a big impact on the credit report but also affects getting any necessary loan in the future.
Limited Regulation
Payday loans are minimally regulated, which is a great chance for most of the payday lenders to charge higher interest rates and fees. Though some states have implemented laws to limit payday loan interest rates, some states still permit APRs of about 300%.
Negative Impact on Financial Stability
Payday lending often results in greater financial instability for most of the borrowers. In turn, payday loan borrowers even struggle to afford necessities. The situation gets worse if the borrower falls into the trap of the debt cycle.
Risk of Legal Action
If payday loans go unpaid and are sent to collections, borrowers may face legal actions. This could be wage garnishment or asset seizure. The collection agency takes further actions to recover the money. They often decide to file a lawsuit against the borrower, which can result in a court judgment. In case the court issues an order for wage garnishment, a portion of the wages will be automatically deducted from your paycheck.
What To Do If You Can’t Pay Back A Payday Loan
If you are constantly struggling to repay the payday loan on time, here are some immediate steps you can take to address the situation and avoid further financial complications:
Contact the Lender
Your first step would be to contact the payday lender directly. You can explain your financial situation and request an extension or a repayment plan. Depending on the situation, most of the lenders will agree to extend the due date or set up an installment plan. It is all about making your repayment more manageable.
Consider a Loan Extension or Rollover
If you still find it difficult to repay the loan on the due date, consider rolling over the loan. In this process, you can extend the loan term for an additional fee. It is how you will get more time to repay the loan. However, as with the additional fees, it may get you into a trap of cycle of debt.
Seek Debt Counseling or Financial Advice
The best is that you can contact a reputable debt counselor or financial advisor and let them assess your situation. Through the professional advice, you can create a budget plan, negotiate with payday lenders. Most ones guide you toward more sustainable debt management strategies.
Understand Your Legal Rights and Protections
Above all these, it is highly recommended to have a better understanding of state-specific consumer protection laws related to payday loans. Some states implement strict laws that limit how payday lenders can operate. It includes caps on fees and interest rates or requirements for extended repayment options.
In Closing
So overall, payday loans don’t always appear on your credit report, especially if they’re paid back on time. In case you default on the loan or it goes to collections, you may need to consider several consequences for your credit score.
To make the complete process transparent, it is recommended to contact a direct payday lender. They can help you with the further process with clearer terms on repayment, interest rates, and fees. Some lenders offer more flexibility when you need to extend the repayment terms or offer solutions to repay.
