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Personal Finance from the Broke Perspective

Do Payday Loans Affect Your Credit?

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Payday Loans' Effect on Credit

If you’re in a tight spot financially, payday loans can be attractive, especially if you have bad credit and have few other resources. A payday loan is usually for a small amount (less than $500), and you need to pay it back in two to four weeks. Even better for many is that payday loan companies don’t check your credit. Any individual is eligible for a payday loan. However, payday loans charge an exorbitant interest rate, and if you’re not able to pay the loan back in time, you can find yourself trapped in a negative payday loan cycle. This happens if you must continue to borrow money to pay what you already owe and what continues to grow because of the interest rates. When you get to this point, you may be concerned about payday loans’ effect on credit.

Payday Loans’ Effect on Credit

How payday loans affect your credit depends on whether you pay them off on time or if you default on them.

If You Pay Them On Time

If you pay your payday loans off on time, the loans have no effect on your credit. That means they won’t negatively affect your credit, but they also won’t do anything to improve your credit.

If you’re looking for methods to improve your credit, rather than payday loans, look to a secured debit card. Most people can qualify for a secured debit card even if they have bad credit.

If You Default on a Payday Loan

If you default on a payday loan, then your credit may be affected. Often, in this case, a payday lender will give your information to a debt collector. When this happens, the loan will appear on your credit report, and it will negatively affect your credit score.

Keep in mind, the payday loan will stay on your credit report for six years. Even if you work hard to improve your credit for three years after you defaulted on a payday loan, a bank may not want to lend you money for a car loan or a mortgage. If the lender sees payday loans on your credit report, those are red flags to the lender.

If You’re Taken to Court

Payday Loans' Effect on Credit
Some payday lenders may choose to take you to court if you default on payments. If you lose the case, once again, this appears on your credit report and will negatively affect your credit score for six years.

Final Thoughts

Before you take out this type of loan, be aware of payday loans’ effect on credit. A payday loan, even one that is paid on time, will not boost your credit score because the payday loan company doesn’t report it to the credit bureau. However, if you default or the payday lender must take you to court to get payment, then the payday loans can negatively affect your credit score for six years. If there is any other option to tide you over until the next payday, use that option rather than taking out a payday loan. For many borrowers, payday loans are traps that continue to spiral out of control months after you take out the original payday loan.

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Options When Consolidating Payday Loans

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Payday Loans Consolidation Options

Payday loans can trap borrowers in a vicious cycle. Because you’re short on cash and/or have bad credit, you borrow money from a payday lender. That money is usually due back in a short amount of time (often just two weeks). Yet, because of high fees and interest rates on the loan, you must pay back much more than you originally borrowed. If you’re unable to repay the loan in time, you can always roll the amount over into a new loan. This is how the payday loan trap begins. However, you can avoid or escape the payday loan trip by utilizing payday loans consolidation options.

Options When Consolidating Payday Loans

You don’t have to stay stuck in the payday loan trap. Instead, utilize these options to consolidate your payday loans.

Get a 0% APR Credit Card

If you still have good credit, consider applying for a 0% APR credit card. These types of credit cards will allow you to transfer your payday loan balance onto the credit card. Most of these types of cards charge a transfer fee of three to five percent. Then, you have twelve to eighteen months of 0% APR, which means every payment you make goes on the balance, allowing you to pay it off more quickly. After the introductory APR expires, you will pay the stated interest rate on the rest of your balance.

Get a PALs Loan

Another option offered by certain federal credit unions around the country is Payday Alternative Loans. These loans are available for $200 to $1,000 and are to be paid back in full in one to six months.

To qualify for a PALs loan, you must be a member of the credit union for at least one month. The credit union is especially interested in your income rather than your credit score, making these loans easier to qualify for than a 0% APR credit card. In addition, these loans can help build and improve your credit score.

Borrow from Friends or Family

Payday Loans Consolidation Options
Photo by Rajiv Perera on Unsplash

If you don’t qualify for either option already stated, consider borrowing from friends or family. However, if you choose this option, recognize that borrowing money can often ruin relationships. To keep this from happening, write out a contract stating how much you’re borrowing and when you will pay it back. For good faith, state how much you will pay weekly or monthly. If you want, you could even offer to pay back the loan with a bit of interest.

Then, dedicate yourself to paying off this loan as quickly as possible. Nothing ruins a relationship faster than someone who doesn’t pay back a loan to a family member or friend.

Final Thoughts

Payday loans seem like an easy, quick way to borrow money, but they can trap you in an endless cycle of debt. To break that cycle, utilize one of these payday loans consolidation options so you can stop paying so much in interest and pay off what you owe.

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What Is Required for a Hard Money Loan?

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When most people buy a house, they take out a loan with a traditional lender.  However, individuals who are interested in buying run down houses to fix them up to then sell or rent rarely qualify for traditional mortgages.  Instead, they seek hard money loans, which have short terms and give the investor more flexibility than a traditional loan.  Before you first enter the home flipping business, it’s important to know what is required for a hard money loan.

What Is Required for a Hard Money Loan?

What Is Required for a Hard Money Loan?

Of course, each lender will have their own requirements, but in general, there are three criteria that are most important when trying to secure this type of loan.  Not surprisingly, many of the requirements circle around cash on hand and experience.

Down Payment

Most banks require a 25 to 30% down payment for residential properties.

In general, a successful hard money loan fit this formula.  Consider the estimated after repairs retail value of the property.  Let say you expect to sell the property for $250,000 when you’re done fixing it up.  Maybe you purchased the property for $100,000.  You expect to complete the repairs for $60,000, and you also want to borrow enough to cover closing costs of, say, $15,000.  Your total comes to $175,000, or 70% of the expected value of the property.  If you use this formula, you will likely qualify for a hard money loan.

Cash Available

What Is Required for a Hard Money Loan?
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Since hard money loans are inherently risky, the lender will take a close look at your cash reserves.  You will need substantial cash reserves to use during the renovation process to pay for things like HOA dues, interest payments on the hard money loan, insurance on the property, and other expenses.

The more cash you have available, the more likely you are to qualify for the loan.

Exit Strategy

The last thing the bank will consider is your exit strategy.  Most hard money loans only have terms of six to 18 months, so you must have a plan for what to do when the loan term ends.

For private properties, there are two basic exit strategies:

Sell

The most typical option is to immediately sell the property when you’re done renovating it.  You settle the hard money loan, get your profit, and are free to go on to invest in the next property.  Some investors go a step further and get a cash out refinance so they then have even more cash on hand to invest in the next property.

Rent

Another option is to renovate the property, then rent it.  When you rent it, the property is now making money.  You’ll be able to go to a traditional mortgage lender and get a traditional mortgage in place of your hard money loan.

Final Thoughts

If you are considering going into the real estate business, you must first learn what is required for a hard money loan.  When you meet the requirements, you’ll be able to secure your first loan.  After you have amassed more experience and cash, you will find that hard money loans are easier to obtain, and you’ll be able to grow your business.