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Positive Impact of Payday Loans on Your Credit Score

There are different types of loans that are available in the market. Depending on the credit score of the individual and his ability to repay, the financial institutions have designed different types of loans out of which borrowers can pick one according to their convenience. One such loan is a payday loan. In most of the open-ended loans, the financial institutions maintain a credit score rating for their clients that is, the borrowers of the institution. The credit score decreases when you borrow loans and then again increases as you keep repaying them. When a borrower applies for a loan, his credit score will reflect his credibility and accordingly loans are approved.

Payday Loans on Your Credit Score

 

Payday loans and Credit Score:

Payday loans are short time unsecured loans provided by financial institutions to their clients to take meet their immediate requirements. Here the borrower is expected to pay his debt on the date of receiving his immediate next wage. So settle it back on the day you receive your pay, and hence it gets the name ‘Payday loans’.  Payday loans also take the approval from the financial institutions based on the credit score of the borrowers. Many borrowers are confused as to, to what extent will these short-term unsecured loans affect their credit score. Let’s sort that out.

Influence of payday loans on credit score:

So here we are going to have a look at what will happen to your credit score when you get a payday loan.

  • Most people, who are not too much into banking systems, have a common opinion that though payday loans have short-term repayment period, they are still unsecured. Thereby it is not always healthy to obtain payday loans on a regular basis.
  • Short term loans such as payday loans may not be of much help when it comes to financing your needs. This is because of neck to neck repayment period and the interest loss that you face. Sometimes these are the ones that you can easily procure even if your credit score is average.
  • However, irrespective of the monetary benefits that you enjoy by buying these short-term loans, they have a positive impact on your credit score.
  • Though it is mandatory that you ought to repay the payday loan that you have procured on the date of receiving your wage, you are still making the payment. Your prompt payment is what will count when your credit score is measured.
  • So every time you get a payday loan and repay it promptly you are automatically increasing your credit score. This will be helpful when you buy other loan-term loans in the future.
  • Unlike what most people think, payday loan doesn’t hurt but help you with your credit score as far as your payments are prompt.

What happens when your payments aren’t prompt?

Though we are positive about the fact that you will repay your payday loans, there will be serious consequences if your payment doesn’t happen on the said date. When a borrower of payday loan has not made his payment properly and has missed his last call as well, his debts are sold to the debt collecting agency. Now the borrower is at the mercy of the debt collecting agency, and this will seriously impact his credit score.

Payday Loans vs. Cash Advances: What’s the Difference?

Among different types of loans that are available for borrowers, there are certain types of loans that can be confused with another loan type. Two common loan types under this category are cash advances and payday loans. Though they are pretty much different in their respective forms, people get it confused because they are short terms loan and the payment process can be quite similar at times. So here we are trying to explain payday loans and cash advances separately so that you will get a better understanding of the terms and use them appropriately in the future.

Payday Loans vs. Cash Advances

Payday loans:

  • Payday loans are short-term unsecured loans available with the financial institutions. These loans are often procured to meet out the short-term financial requirements, sometimes very short-term, in fact. This is because of the way payday loans work.
  • When a borrower obtains a payday loan, he is expected to make his repayment the day when he gets his immediate next salary. So the borrower produces a post-dated cheque which the banker or the financial institution can encash after the borrower’s account is credited with his salary.
  • Payday loans are usually said to have a positive impact on the borrower’s credit score as long as he makes his repayment promptly.
  • In the event that the borrower doesn’t pay his loans, the debt is sold to a debt collecting agency and the borrower is expected to make his payments there. This is how payday loans function.

Cash Advances:

  • The major reason for using the terms cash advance and payday loan interchangeably is because there are two types of cash advances of which the first and the infamous type works exactly like payday loans. You advance a particular amount of cash and you are expected to repay it in a month or when you receive your salary. Here the credit score of the borrower is not taken into concern.
  • But this is not how the conventional type of cash advances work. It is exactly like the way your credit purchases work. The borrower is expected to hold a line of credit or a valid credit card that makes you eligible for the quantum of cash advance that you require.
  • Unlike payday loans, there is some waiting period in cash advances as the approval process is quite tough on the borrower. So the borrower will have to wait for the approval before getting access to his loan. The credit score of the borrower is also scrutinized during the approval process.
  • While payday loans are usually used for personal requirements, cash advances are obtained for professional and business requirements.

These are some of the differences between cash advances and payday loans. So the next time you make use of these terms, make sure that you use them appropriately.