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 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.