This BLOG On What Are Payday Loans And Using It To Establish Credit Was UPDATED On January 26th, 2019
Payday loans are personal loans given by a private business that is other than a bank or credit union. These loans are not recommended due to the extremely high-interest rates they charge. However, for disciplined consumers, it can be used to their benefit in re-establishing their credit after bankruptcy and/or housing event.
- These private businesses are normally in business to give private short term loans secured by the employer’s paycheck
- Lenders will give advance money and will take a percentage of the paycheck
- These companies charge high interest until the loan amount is paid off
- Many lenders will take multiple post-dated checks
- Interest on loans is extremely high
- Some being as high as 100%
- Businesses that offer payday loans normally report the customer’s payment history to all three credit reporting agencies
- There are pros and cons to payday loan companies reporting payment history to all three credit reporting agencies
- The pros are that it is an excellent way of re-establishing credit for those with bad credit
- It is super important to make timely payments to the payday loan store
- The cons are skipping a payment or multiple payments or default on a payday loan will ruin credit and credit scores
- Make sure prior to taking out payday loans to be able to afford the payments
Make sure to pay scheduled payments on time.
Negatives Of Payday Loans
Consumers can get deeply in debt with payday loans.
- Since lenders charge extremely high-interest rates and high fees
- It makes it difficult for consumers to pay off the loan and still meet their other monthly debt obligations
- It is easy to get multiple loans from various lenders which will overwhelm consumers in meeting their other monthly debt obligations
- It should not be used on a continuous basis
- There will be no end
- Eventually, consumers will end up defaulting on all of their loans
For those who have multiple loans should restructure their debts and make paying off the payday loans an utmost priority.
Advantages Of Payday Loans
Consumers with prior bad credit trying re-establish credit, getting one payday loan from a payday loan store which reports payment history to all three credit reporting agencies, then payday loans may be an excellent way to re-establish credit.
- They should start with three secured credit cards
- Possibly one payday loan and credit scores should definitely shoot up
- Payday loans are reported as installment loans on credit report
- Secured credit cards are reported as revolving credit accounts
- Having a variety of different types of credit is an excellent way of maximizing credit scores and re-establishing credit scores
- Again, do not use payday loans on a regular bases
- The interest rates are high and only use payday loans is in cases of extreme emergencies
Use it as a tool in reestablishing credit.
Cases Where Borrowers Use Payday Loans
As mentioned earlier, these loans have out of control interest rates and can be compared to getting a personal loan from a loan shark. However, in a legal way. It is also extremely easy to get, even with bad credit.
- There are cases where these loans are necessary and might be worth paying the high-interest rates
- For example, on subzero temperatures and furnace goes out?
- Maybe this type of loan may come in handy in this case since it is an extenuating circumstance
- Money is hard to come by
- Payday loan stores realize that so that is why they can get away with charge the maximum interest rate legally possible
- States monitor the maximum interest rates
Some states have tougher interest rate caps than others.
January 26, 2019 - 3 min read