Does Paying Off a Payday Loan Help Your Credit?

If you were in need of some quick cash, you may have resorted to taking out a payday loan. If you paid off your payday loan, you might be wondering, does paying it off help your credit? This post answers that question in much detail.

Does Paying Off a Payday Loan Help Your Credit?

In most cases, paying off a payday loan will not affect your credit because payday loans are not reported to the credit bureaus. Since they’re not reported, they don’t appear on your credit report and therefore have no impact on your credit score. So, paying off a payday loan will not increase your credit score.

Since payday loans are not reported to the credit reporting bureaus, they do not appear on your credit report. Since they don’t appear on your credit report, the credit scoring models do not factor them into your credit score. So, paying off a payday loan will likely not help you build credit.

That said, failing to pay off a payday loan does not directly affect your credit because payday loan payments are not reported to the credit reporting bureaus. So, your failure to pay back a payday loan does not directly affect your credit score.

That said, failing to pay off a payday loan can indirectly affect your credit score as the lender may ask a collection agency to take on the task of collecting the outstanding amount that’s due.

In the process, the collection agency may report a collection account to the credit bureaus, significantly lowering your credit score. So, even though late payments are not reported to the credit bureaus, this does not mean that failing to pay will not cause damage to your credit, because they can negatively affect your credit.

Why Doesn’t Paying Off a Payday Loan Help Your Credit?

Paying off a payday loan does not help you build credit because payday lenders do not report your account status to the credit reporting bureaus. So, making your payments on time or even paying off your payday loan has no effect on your credit. Just as on-time payments don’t appear on your credit report, late payments do not appear on your credit report. Since your payment history is not reported to the credit reporting bureaus, your timely payments or lack of payment has no effect on your credit.

What is a Payday Loan?

For those who are not familiar with payday loans, payday loans are short-term loans that provide quick cash. The application process is very easy and can be completed in just a few minutes. If approved for a payday loan, the lender deposits the funds into your account fairly quickly. Typically, you have a very short period of time to pay back the loan. For example, many lenders require repayment within as little as two weeks.

Typically, to obtain a payday loan, you must provide the lender with a post-dated check that the lender can cash at a pre-determined time. Typically, the date chosen is the date that you get paid, hence the term payday loan. Although it may seem like a good way to borrow money, you should try to avoid them if possible.

You should try to avoid payday loans because they are extremely expensive. For example, taking out a $1,000 payday loan can cost you approximately $150, meaning you will have to pay approximately 15% of interest to borrow money for just a few short weeks. Other lenders may charge you 15% or less to borrow money for an entire year. So, unless a payday loan is your last resort, you should steer away from them because they are extremely expensive.

The worst part of payday loans is that many people only plan on taking one payday loan, but then get caught up in a vicious cycle of payday loans, requiring them more and more often.

So, if you need a way to borrow money and you have good credit, you should consider applying for a personal loan. Personal loans are significantly less expensive than payday loans, and they can provide more money. Payday loans are typically limited to $1,000 because the more money they lend out, the higher risk that borrowers will not repay them.

What Happens If You Don’t Pay Back Your Payday Loan?

If you don’t pay back a payday loan, the first thing your lender could do is send your unpaid debt to a collection agency. The collection agency will then attempt to collect the amount from you. In attempting to collect the money from you, the collection agency may add a collection account to your credit report by reporting the unpaid debt to the credit bureaus. A single collection account can lower your credit score by 100 or more points. So, if you care about your credit, you should consider paying back your payday loan.

Additionally, some of the other consequences for not paying back a payday loan include being sued in civil court for the amount due. Some lenders will also charge you late fees and interest if the loan is not paid back on time. It all depends on your payday lender.

That said, the worst thing that can happen to your credit is a collection account being added to your credit report. If a collection account is added to your credit report, it could lower your credit score by 100 or more points, and it will remain on your credit report for 7 years from the date you failed to pay back the loan.

Paying off a collection account will not remove it from your credit report. So, make sure to pay off the loan before it’s sent to a collection agency.

Should You Use Payday Loans?

You should only use payday loans as a last resort. Payday loans are very expensive, with some lenders charging as much as 15% interest for borrowing a small amount of money for 2 to 4 weeks. So, you should approach them with extreme caution because that is extremely expensive to borrow a small sum of money.

Most personal loan lenders charge less than 15% to lend you money for a year, not 2 to 4 weeks. So, payday loans should only be used as a last resort.

Additionally, before taking out a payday loan, you should consider the fact that you could be placing yourself in a vicious cycle of continually relying on payday loans. So, approach using them with caution.

If you need cash and you have good credit, you should consider taking out a personal loan. Personal loans are significantly less expensive than payday loans and personal loan lenders allow you to borrow much more money. So, consider them as an option if you need cash.

Frequently Asked Questions (FAQs)

Q: Does paying off a payday loan affect your credit?

No, in most cases, paying off a payday loan will not affect your credit because payday lenders do not report your account status to the credit reporting bureaus. Therefore, they do not appear on your credit report nor do they affect your credit score.

Q: Can you pay off a payday loan early?

Yes, some payday lenders allow you to pay off payday loans early. However, some will charge you a fee for doing so. So, check with your lender before paying off the loan early.

Q: Are payday loans expensive?

Yes, payday loans are extremely expensive. They are significantly more expensive than borrowing money on credit cards or taking out a personal loan.

Q: How long do you have to pay off a payday loan?

Typically, payday lenders will give you 60 days to pay off the loan. If you do not pay it off, they will send the debt to a collection agency. The collection agency can cause significant damage to your credit by reporting a collection account to the credit bureaus, causing a collection account to appear on your credit report.

Q: Does paying off payday loans increase credit score?

No, paying off a payday loan will not increase your credit score because payments are not typically reported to the credit bureaus. Therefore, they don’t appear on your credit report, therefore, they will not increase your credit score