Payday loans are basically short term loans where the lender gives a small amount to the borrower at higher interest rates than conventional loans. The repayment of a payday loan is done when the borrower receives their next paycheque. There could be many reasons why a person would want to take a payday loan, the most common of which is emergency expenses.
Lenders will ask for your credit score to determine whether you can afford to pay the loan with the next paycheque. While most lenders will require you to meet the minimum credit score, there are a few lenders who may offer payday loans to people with bad credit. In such cases though, you will most likely bear higher interest rates. Let’s first see the reasons for which people should take payday loans and what role credit plays in the loan approval.
Reasons to Take Payday Loans
The concept of a payday loan is ideally, to cover costs that require your immediate attention when you don’t have enough money at hand. Clearing medical bills, getting your car repaired, and getting one of the home systems fixed that needs immediate repair are some of the genuine cases where payday loans can be acquired.
Basically, what a payday loan does is that it helps you address your immediate financial needs until you receive your next paycheque. It is important to understand that payday loans have been created to provide short term financial support, only when you are in need. So when you repay the loan, for instance, next month, your financial position will improve. Once a payday loan has been approved, you will receive it within 1 hour or 24 to 48 hours.
Your credit score does play an important role in the approval of a payday loan. Generally, people having average to good credit score will be able to quickly acquire payday loans. Lenders will generally ask for details from you, which include:
- Copy of current and past paycheque
- Bank statement
- Credit score
By providing a copy of your current paycheque, you inform the lender that you can afford to repay the loan and that it matches the amount you want to borrow. However, if your current paycheque does not match the funds that you want to borrow, then you will have to settle for a lesser amount along with higher interest rates.
The one question that many borrowers have is: How much does a payday loan impact the credit score? The answer to this is that if you repay the loan in full and on time, then it will actually have a positive impact on your credit score. So the next time you want to acquire a payday loan or a mortgage, the lenders will look into your credit report and will be satisfied that you have responsibly cleared your loan. But it will adversely affect the score if you are delaying payments. In conclusion, if you decide to take a payday loan, know that it won’t impact your credit score only if you clear it on time.