Payday loans can be seen like a life saviour for many people at the time of sudden cash crunch might feel like a bad financial decision of life. It can be both depending on the circumstances and the way you handle your finances.
At one instance, you apply for such instant cash loans at the time of finding uncertain financial crises and all the doors of arranging money have been closed for you. This way you arrange for some cash instantly and pay off your pending expenditures.
The other common scenario in which people regret applying for payday loans is finding negative credit ratings and difficult to repay the loan.
So, in this blog, we will be discussing about the latter scenario in which borrowers find it cumbersome to repay the loan and find negative impact on their credit scores.
Information Related to Payday Loans
As you already know, payday loans are fast cash benefit fiscal assistance that you can avail from a private lender. The loan is offered against your next paycheque giving you a maximum of $1500 as the loan amount. It totally depends on you to make the best usage of loan amount. Also, interest rate and financial charges are levied on such short term loans and are comparatively higher as compared to other monetary offers.
No, what you need to see that how does payday loan affects and show on your credit score? Well, the answer lies in a way you handle your finances, make timely payment of the loan without any carry forward.
And, to understand all this, you need to first look at financial charges as per different area in Canada.
Different State Regulations for Payday Loans
|State||Finance Charges||Maximum Loan AMT||Loan Term|
|Alabama||Not more than 17.5%||$500||10 to 31 days|
|Alaska||Not more than $15 for every $100 borrowed||$500||Minimum 14 days|
|California||15% of the face value||$300||Up to 30 days|
|Florida||Not more than 10%||$500||Less than 60 days|
|Kansas||Not more than 15%||$500||7 to 30 days|
|Michigan||15% for first $100, 14% for second $100, 13% for 3rd $100m and more||$600||Maximum of 31 days|
Source: Credit Karma
There are other cities too like Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Saskatchewan, and more, where the maximum borrowings, rate of interest, and number of repayment days differ for borrowers.
From the above table you can constitute the fact that payday loan borrowers belonging to different region in Canada will have different financial circumstances after getting the loan. But one thing is common is inability to pay higher interest rate and late payment charges at time to stock up piles of debt over the head and go for another payday loan to pay off the previous one.
Apart from the above, there are several negative sides of the payday loans that are as follows:
- High APR: For example, if you apply for a 2-week loan against your next paycheque and acquire the amount up to $500. In this scenario, you will be charged with $15 for every $100 you borrow and if the amount comes to full $500, then you have to do total interest charges of $75 along with financial fees as will. So, it will be 400% of the annual percentage rate that levies heavily on your head.
- Short Term Tenure: The small term loan repayment period does give you much benefit. On the contrary, it creates pressure on you to make the repayment well on time, other late payment feel will be added, and your credit position goes down.
- Additional Fees: It is types of fee that you pay as extra when fail to repay the loan amount. Remember, these fees keep in adding after every single payment miss.
- No Chance of Building Credit: Most importantly, your negative paying history allows lenders to showcase it to the credit agency and that makes your ratings go down.
Source: Credit Karma
Different Ways Negative Credit Reflect on your Financial Position
If you think in this way that mere applying for payday loans will affect your credit score, then you are totally wrong in that. Lenders have no interest in your past credit position and current ratings to offer payday loans.
But yes, it can affect and showcase on your credit report, if you commit the following few financial mistakes.
- Check Bounce: Sometimes payday loan lenders ask the borrowers to give them a post-dated quench of the loan amount borrowed. It then allows the lenders to encase the quench on the due date of the loan repayment. But when your quench bounces, then lenders send this information to the collection agency and they report on the credit bureaus to negate your credit ratings.
- Insufficient Funds: If you have added the functionality of automatic debit of the loan amount on the due date from your bank account, then you have to maintain a sufficient balance. In case, you will not, then again lenders will report the same to collection agency, then to credit bureaus, and resulting in negative scores.
- Loans Go to Collection Agency: Another common way payday loan appears negatively on your credit report when this information send to the collection agency. If this happens, then collection agency creates a report of your financial condition with a special mention of unpaid loan amount and sends the same to bureau for further lower down your credit position.
Possible Alternatives of Payday Loans in Canada
Now, you must be getting an idea as to how payday loans appear on your credit report, and ways to avoid theme. Another alternative is applying for other fiscal offer rather than payday loan. So, here we have few options for you.
- Home Equity Loan: As the name itself implies, this type of loan is offered against your property in which you reside. Lenders will pay the lum-sump amount to borrowers with fixed interest rate and lenient terms and conditions.
- Line of Credit: This again is taken against your home as equity. But the only different is withdrawing money from the credit card as per the value of the property and pay interest charges accordingly.
- Consolidated Loans: These loans are offered for borrowers who tried it hard to settle the previous loan amount. For this very reason, you can get consolidated cash against earlier pending loans and repay the same on time.