Why Pay Day Lender Loans Will Ruin Your Credit Rating
Let’s face it, there is no quick fix… if you need money fast, and you are not patient these loans can seem very attractive. The sad thing is that by having one of these loans, it can cost you more than you know.
Payday loans are way too easy to obtain, and they could leave a lasting bad taste in your mouth if you ever go for a home loan or car loan later on down the track. Unlike another more traditional style of loans or credit card applications that take time and forms to apply for credit, the average Joe can get a payday loan during your lunch hour. This ‘instant money’ gives you little time to think over the consequences on your credit rating or to even consider other solutions, including not spending the money at all! Payday loans carry no right of recession, either. That means if you change your mind shortly after you sign the papers or if your spouse convinces you to call it off, that’s too bad.
You can’t back out……
Many payday loan companies require direct access to your bank account. It is usually promoted as a “customer service,”. Providers just take the payments straight out of your bank account. You don’t even have to write them a check, transfer money or authorise the transfer! Good luck trying to get that stopped! And then, when the balance of the debt has grown, and you can’t afford to pay it back and still afford your basic living expenses, they just continue trying to shove their payment through. That means on top of the hideous interest rates, you’ll get overdraft fees from your bank, too.
On the day of reckoning, when you owe more than you can repay, you can expect a visitor at your door in the form of a debt collector.
Payday loans are incredibly expensive. Think about your most expensive credit card. It may have an interest rate of 28 percent or 36 percent — tops. How does an interest rate more than 10 times that high sound?
If a $100 payday loan costs you $15 for 10 days, that’s an annual percentage rate of almost 400 percent.
Payday lenders are most prevalent in neighbourhoods where a significant number of residents cannot qualify for mainstream loans. It’s easy money, “accepting money with no credit check has its price, and it’s called
Debt grows fast at these rates. “You will most likely end up paying three, four or even 10 times the amount you originally borrowed. Debt created by payday loans will often quadruple in just one year,” says Connolly. “One tiny mistake can mean lifelong debt.”
Many people can get stuck in a repeat cycle of debt.
Small loans often temp a client to quickly pay the debt off including the interest, and often we see small debts rollover to larger debts enticing the client to roll over current funds to obtain more credit and therefore extending the term for a small increase and a higher weekly sum to be paid to the lender. Nonetheless, according to Center for Responsible Lending research, 76 percent of payday loans are to pay off old payday loans. The nonprofit consumer group also reported that even though most payday loans are to be paid within two weeks, on average the borrower stays in debt for more than half a year.
So, do payday loans actually go on my credit file?
Yes. Absolutely. Your credit file is a detailed record of your credit history, and as such will include details of any payday loans you have applied for or taken out.
What are some common mistakes to avoid when it comes to payday loans and your credit file?
Taking out a payday loan could be a quick decision you make to cover some emergency expenses, but don’t let the ease of the application process lead you to commit any of these common mistakes:
Mistake 1: Taking out too many loans
Once you have repaid a payday loan, you may be tempted to take out another one. But taking out several small amount loans may be a sign to future prospective lenders that you are not in a stable financial position.
It doesn’t matter if you are repaying the loans on time; the fact that you needed to take out so many loans, to begin with, may not be a good sign to lenders.
Mistake 2: Not making your repayments on time.
As mentioned earlier, repayment history is now listed on your credit file. This makes it more important than ever to make your repayments on time. Any missed or late repayments will be listed on your file and will be able to be seen by any lenders who look at your file for two years.
Mistake 3: Making several applications in a short space of time
As well as taking out too many loans, you should avoid making too many applications within a short time period if you aren’t approved for a payday loan. All applications show up on your credit file, and now account opening dates are visible, so lenders will be able to determine whether you were approved based on your applications and how many accounts were opened. Making several applications can indicate that your finances
aren’t in good standing. If you were rejected it can give another lender a reason not to approve you.
Mistake 4: Not checking your credit file
When making loan applications online it helps to stay on top of your credit file to watch for identity theft. It’s also important to check that the loan is being listed correctly, and also to see what your current situation looks like to lenders who do check your file.
Payday loans, just like any other type of credit, can have an impact on your credit score — but whether the impact will be positive or negative depends on you.
To check your credit rating and discuss alternative loans that are right for you, please contact the Stay at Home Mum approved Finance Guy, Alex at Future Funding!