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Do Payday Loans Check Credit

Do Payday Loans Check Credit

do payday loans check credit? First, however, it’s essential to understand all the potential consequences of a payday loan—like that it can hurt your credit score. 

What is a payday loan?

A payday loan, also known as a cash advance loan, is a short-term, high-interest loan based on your income. The loan is typically for a small amount, around $500 or less on average. 

Payday loans usually work as a way to borrow from your next paycheck. Because the arrangement expects you to pay the money back using your upcoming paycheck, the loan term is usually just a few weeks long (usually two weeks or one month). 

The entire process of getting the loan takes only a few minutes, which is another reason it’s so tempting for people in a financial emergency. First, the payday lender verifies your income to ensure you can repay the loan. Next, they verify your bank account so they can deposit the funds.

Once you’re approved for a loan, the funds will be deposited into your account. 

You’ll also have to sign two post-dated checks for the loan amount and the interest on the loan. These checks will coincide with your next payday so the lender can get their money back quickly. 

The majority of people who take out a payday loan have poor or little credit. As a result, payday lenders charge incredibly high APRs and take post-dated checks for repayment to offset the risk of lending to people with bad credit. 

Even in an emergency, payday loans are usually not the best option. The Consumer Financial Protection Bureau (CFPB) refers to payday loans as “debt traps” and encourages consumers to be aware of the risk of payday loans.

Many states have passed regulations to minimize the damage payday loans can do. 

Payday lenders understand their borrowers are in a vulnerable situation and take advantage of this with extremely high interest rates.

Why are payday loans often a bad idea?

Payday loans often trap people in a cycle of debt due to these three things.

High APRs

The most problematic factor of payday loans is the high APRs. Payday lenders typically charge a dollar or interest amount per $100 borrowed. The typical APR ranges from $15 to $30 per $100 borrowed.

Some states have limitations on how much payday lenders can charge, but the average APR nationally on payday loans is $15 per $100. Over a two-week loan term, that equates to a 391 percent APR. 

Let’s say you borrow $400 for two weeks. At the end of the two weeks, you’ll owe $460, which translates to an interest charge of $4.29 per day. Even credit cards, which are notorious for having high interest rates, typically only have an APR between 11 and 27 percent. 

Short loan terms

Since payday loans are for such a short term, it tends to bring people into a never-ending loop. As the person borrows from their next paycheck, they’ll be in the same situation on their next payday. A couple of weeks is not enough time for a person to get back on their feet. 

More fees

While the high APRs on payday loans are bad enough, unfortunately, there are more fees borrowers should be aware of.

Rollover Fees 

The CFPB previously reported that four out of five payday loans are rolled over or renewed. This means that 80 percent of people who take out a payday loan can’t repay it when their payday arrives.

Unfortunately, rolling over the loan incurs additional costs. Some lenders allow their borrowers to pay just the interest and roll the loan over to the next payday. 

In the earlier example, this would mean paying the $60 interest and rolling over another $460 for two weeks. This means the borrower is paying $120 to borrow $400 for four weeks!

Repayment plan fees

Some lenders offer repayment plans when an individual can’t pay back their loan. Depending on your state regulations, fees for repayment plans may or may not be allowed. 

Late fees

If you make your loan payment late, the lender may charge a late fee or returned check fee. This varies from state to state as some states don’t allow payday lenders to charge late fees. Additionally, if a check doesn’t clear, you may find your bank also charges you a fee for insufficient funds. 

State regulations of payday loans

Since payday loans can be so predatory, many states have stepped in and implemented regulations on these lenders. These regulations can be on lending amounts, loan terms and fees. 

Here are some examples of state regulations:

  • California has the lowest maximum payday loan amount at $300.
  • Oregon has the highest maximum payday loan amount at $50,000.
  • Some states have a maximum payday loan amount based on the borrower’s income. For example, Nevada’s maximum is 25 percent of the borrower’s expected gross monthly income.  
  • Currently, payday loans are not legal in 11 states (Arizona, Arkansas, Connecticut, Georgia, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia). 
  • Texas is currently the only state with no restrictions on payday loans.

Before considering a payday loan, it’s essential to check your state’s regulations on payday lenders. This will give you some insight into the limitations and protections surrounding these loans in your area.

Unfortunately, not all states have set regulations around payday loans, but it’s worth checking. 

Do payday loans affect your credit?

Technically speaking, if you pay your payday loan on time, it could positively impact your credit score. Anytime you pay loans in full and on time, it’s a positive addition to your credit report.

Unfortunately, though, most payday lenders don’t bother reporting on-time payments to credit bureaus. 

Alternatively, making late payments or missing payments can negatively affect your credit. And payday lenders are much more likely to report this type of activity to the credit bureaus.

Additionally, if you keep missing your payments, the payday lender may sell your outstanding debt to collections. Having a debt in collections will harm your credit score as well. 

What to do about a payday loan in collections

If your payday loan goes to collections, it’s important to make a plan of action as quickly as possible. Consider contacting the collection agency and negotiating your debt down if you pay it all up front.

Debt collectors often offer individuals a discount if they agree to make one large payment to get rid of the debt. 

Make sure you educate yourself on how to negotiate with and pay a collection agency. Get everything in writing, and avoid giving them direct access to your bank account. 

Note that if you go this route and negotiate, the debt will show as “settled” rather than “paid in full” on your report. Of course, “settled” isn’t as good for your credit report, so you’ll have to evaluate if this distinction is worth the money you save on the debt. 

Regardless of how you pay off the collections charge, the negative item can stay on your report for up to seven years.

Who can get a payday loan?

To qualify for a payday loan, the borrower must:

  • Be 18 years or older
  • Have a piece of government-issued ID
  • Have proof of income (usually a paystub)
  • Have an active bank account 

Additionally, some lenders may require a Social Security number. Payday lenders don’t check the borrower’s credit score, so having a bad or thin credit score won’t impact eligibility. 

Still, individuals can have all the above and be denied a payday loan. For example, payday lenders with an APR over 36 percent legally must deny active-duty military, their spouses and their dependents for loans.

Alternatives to payday loans

It’s important to understand there are plenty of alternatives to payday loans that have better terms. Some of the options include:

  • Personal loans: Personal loans will offer a lower APR than a payday loan and a longer loan term. If you have poor credit, consider applying at a credit bureau rather than a bank. Credit bureaus are more likely to lend to people with lower credit scores. 
  • Cash advances: There are cash advance apps that offer interest-free advances on your upcoming paycheck. These advances are usually only a few days before your paycheck. Additionally, you’ll have to apply and be approved for the advance. Alternatively, you could ask for a cash advance from your employer. 
  • Borrowing money: If you have someone in your life you can lean on, consider asking them for a loan. 
  • Debt settlement: If you need money because your debts are out of control, consider debt settlement instead. 
  • Extended payment plans (EPPs): If you already have a payday loan, your payday lender may have an extended payment plan option. This is a mandatory requirement in some states. 

Should you get a payday loan?

It’s strongly recommended that you explore all your options before deciding to take out a payday loan. However, if this turns out to be your only option, make sure you pay the loan back as soon as possible. Payday loans can hurt your credit and financial stability.