Are Payday Loans Bad For Credit?
Are looking at taking out a loan that can tide you over and help pay the bills until you reach your next payday? If so, then you can see why payday loans might seem like an attractive option. They are approved instantly, meaning you can see the cash in your hands immediately. This fast process gives you the freedom to spend your money on anything you need before repaying the loan. But are they too good to be true? We take a closer look at payday loans, the fees involved, and ask: are payday loans bad for credit?
What are Payday Loans?
Firstly, let’s take a look at what exactly a payday loan is. A payday loan lets you borrow up to $2,000 and pay it back in any space from 16 days to one year. These loans are typically based on how much you earn, with the idea that you will pay off the loan in your next pay cycle.
Many people consider a payday loan a great quick fix to their problems. Maybe an expected bill has come up, such as a parking fine. Perhaps you are wanting to take a holiday and need help funding it. Or maybe you’ve found yourself in an accident and can’t afford the medical bills. This short term loan acts as a ‘get-out-of-debt-free’ card for many people. You can apply for a payday loan and receive approval straight away, which is what makes them such a great short-term option when you need the cash. However, they aren’t exactly free.
This convenience does come at a price. Payday loans have plenty of fees involved and end up costing you a lot more than the amount you borrow. They also come with very high-interest rates.
Fees on Payday Loans
One thing many people don’t take into account when obtaining a payday loan is the fees involved. Here is a quick rundown:
- Establishment fee: the maximum fee is 20% of the amount borrowed.
- Monthly service fee: the maximum is 4% of the amount borrowed each month.
- Government fee: this fee covers any Government duties.
- Missed payment fee: if you are unable to make the scheduled payment you will face another fee.
- Enforcement fee: this is charged if you default on your loan.
Of course, there are fees involved in all types of loans. Therefore, this is something you need to take a look at when exploring your options. So let’s move on take a look at another issue: are payday loans bad for credit?
Are Payday Loans Bad for Credit?
While the fees may not be an issue for you, it is worth delving further. It is worth considering whether payday loans are bad for credit. The answer is both yes and no. In fact, if paid off correctly, payday loans can actually help your credit score.
Your credit score takes into account your history of paying back loans. Have you have taken out payday loans in the past? If you have paid them on time, have met all the repayments and fulfilled all the terms, then it will actually reflect favourably on your credit score. This can actually help you take out more loans in the future.
However, this is not the case if you regularly miss payments, aren’t able to pay back the loan or end up defaulting. This will be marked in your credit score and affect your chances of taking out a future loan.
Just like any other form of credit, as long as you meet the payments on time, it can give your credit score a good boost. This may leave you wondering if a payday loan is right for you?
Should I Take out a Payday Loan?
Before deciding whether this loan is right for you, take a look at your current financial position. Consider the fees and interest-rate involved with your loan. If you feel you can meet the repayments and pay off the loan in the required period, then it could be a good option for you. Particularly since it can give your credit file a big boost. If the fees and interest are too much and will prevent you from paying back the loan, then it is better to know this before going ahead. Many people mistakenly don’t consider these factors before taking out a payday loan. This is where the issues lie.
Despite the high fees, a payday loan can be very beneficial at providing financial relief in your time of need. It is about weighing up your circumstances and deciding what is best for you.
Need a Loan?
Are you looking to take out a loan but aren’t sure where to turn. If you are wondering whether a payday loan is the best option for you or want to look into alternatives, speak to the professionals at Bad Credit Loans. We will take a look at your credit score and financial situation and offer the best advice for your circumstances. Find out more today.