Payday loans are a form of cash advances that come in handy when you need funds for an emergency. The attractiveness of such types of loans is that they do not involve credit checks.
This means that applying for payday loans does not impact your credit ratings. However, how a borrower uses such loans have various outcomes that may affect their credit scores.
The payday lender uses a post-dated check as a guarantee that you will be able to pay off the debt using your next salary.
What Happens If You Cannot Repay in Time
The problem arises where you default on your loan. Defaulting on the cash loans may lead to debt collection practices which may negatively impact your credit score. For example, if you fail to pay your payday loan when it is due, your lender may file a lawsuit against you in an attempt to recover the amount.
If the case is ruled in favor of the payday lender, this will then be reflected in the public records section of your credit report. In most cases, the defaulted payday loans are sold to debt collection agencies. Such an incident is then reported to the credit bureaus.
Your defaulted payday loan will then be recorded, resulting in a lower credit rating. If you are seeking funds that can be paid within a short period of time, payday loans will be a great option.
However, you should have a repayment plan in place so that you may make prompt repayment when it is due. This will ensure that your credit will be in good standing.
Payday loans should be your last option if you are in dire need of funds and have run out of options on how you may access funds.
Before settling for a payday loan, you should try getting a loan from family or friends, using your credit card, or reducing your expenses.
You can also borrow from your bank or credit union. You may also get funds from other types of cash advances such as a credit card, a salary advance or a refund anticipation loan.
However, if you are not successful in getting quick cash through other sources, you may then apply for a payday loan.
You may have to visit a payday lender’s office or get an online payday loan. However, you should only borrow an amount that you are confident of repaying.
Watch Your Credit Rating
You should watch your credit rating closely to ensure that you stay in good financial standing. Also, you should avoid situations that may potentially lead to adverse effects on your credit rating. You can obtain your credit scores and credit reports free of charge.
With AnnualCreditReport.com, you can get a free copy of your credit report. Also, using tools such as the credit report cards available on Credit.com can enable you to monitor your credit scores.
Setting up an emergency fund can assist you in having funds at your disposal should you meet an unexpected financial obligation.