Do unpaid payday loans affect credit?

Payday loans are a specific type of loans that are short-term, small amount, unsecured loans which are linked to the paycheck or the payday. They are also occasionally referred to as ‘cash advances’. Payday loan lenders do not check the credit history of the burrower. People who are employed and get a regular paycheck have to provide proof of employment and regular salary to avail of payday loans with very low interest rates.

After payday loans no interest on first loan get approved, the loan amount gets deposited into the bank account, or you may receive it in cash or bank check. The loan amount needs to be repaid over a course of a few weeks or months, as mentioned in the payday loan contract, along with interest, fees, and other charges. Burrowers can repay with a check or have the amount directed debited (ACH) from their bank accounts or paychecks.

The good and bad of payday loans

The best part of low interest payday loans same day is the fact that you can easily avail of some fast cash whenever you are in dire need of it. It can be very useful in emergency situations, like repairing your car, etc., when are in need of quick cash.

Payday loans have to be used for the purpose that they are taken out for. You should not take out payday loans with no interest on first loan for frivolous expenditure like buying expensive clothes, partying, etc. Also, it is important to make the regular repayments of the payday loan and finish it off in the stipulated time period. If you miss the repayments, then the interest charges and other fees can escalate very quickly and spiral out5 of control, resulting in a debt trap.

How do payday loans affect credit?

Payday loan lenders do not report any instance you having taken out a payday loan to the credit bureaus. The CFPB/Consumer Financial Protection Bureau has however advised that burrowers’ history of taking payday loans is collected by specialty credit reporting agencies and such data may possibly be available with payday loan lenders.

Payday loans are similar to other types of personal loans in the sense that non-payment of loan account gets passed onto collection agencies who then report the default on repayment of loan to all the major credit bureaus. This can thus adversely affect your credit.

The level of impact that it can have on the credit score cannot be predicted. But such reporting of payday loan repayment default will definitely lower down the score.

Thus, the reasons for which you take out payday loans with no interest on the first loan and the manner in which you handle and spend the loan amount, will help determine whether or not you will stay on track on the repayment schedule of the loan. Missed payments can quickly result in unmanageable debt, payment defaults, and adverse impact on the credit score.