Every year, 12 million Americans use payday loans to manage their cash flow. Many of the people who use them have low credit scores or no credit history.
Bad credit limits your options for borrowing money, but you can still make the right financial choices. Let’s consider how payday loans for bad credit work and what you need to keep in mind before applying for them.
What Are Payday Loans?
Payday loans are short-term loans without collateral that allow you to borrow money against the expected income from your job. In most cases, these loans are due when you receive your next paycheck or over the next several paychecks.
When you apply for a payday loan, most lenders will not check your credit score, unlike other types of loans that require a credit history to qualify. All that is required for a payday loan is a valid identification and proof of employment, then you’re almost guaranteed an approval!
5 Benefits of Payday Loans for Bad Credit
Payday loans could be a viable option for someone with a low credit score. It’s more than just being able to qualify with bad credit — there are other advantages to this type of borrowing as well, such as the following:
Payday Loans have a Quick Application Process
Firstly, applying for a payday loan is quick and simple. You are not required to provide various documentation or spend hours at a banker’s office while they dig through your credit history. Moreover, an online application can be completed from home at anytime. All you need to do is fill in the information requested and you’ll hear back from the lender shortly afterwards.
Approval and Funding Are Fast
As long as you meet the minimal criteria of having the proper ID and proof of employment, your lender will approve your loan instantly. Once you’re approved, you’ll directly receive the funds by electronic transfer before you know it.
In many cases, you can apply for the payday loan and receive your money on the same day. But in worse case scenarios, you’ll receive it in no more than 2 to 3 days, which is still great!
No Long-Term Payments
Payday loans are tied to your short-term pay cycle, so, instead of making payments for the next months or years to come, you are expected to pay out the loan instantly. Most payday loans for bad credit applicants are structured to get paid off after you receive your next paycheck, which usually takes less than a month. With this type of loan, there’s only one payment for you to make. But even if the loan is not paid within a month, you will not be tied to it for a long time, unlike one of the traditional financing options.
You Can Qualify With Bad Credit
Perhaps the biggest benefit of payday loans is that your credit score is not taken into consideration, so even if it is extremely low, it doesn’t matter.
Most banks and other traditional lenders trying to mitigate financial risks will lend you money only if your credit score is sufficiently high, which can mean a high number. The paradox is, of course, that the people whose credit scores are high enough are usually the people who don’t need to borrow money.
If you haven’t built any credit history yet, or your credit history disqualifies you from traditional financing, you can still qualify for a payday advance loan.
Multiple Uses of the Given Funds
Another significant difference between payday loans and other types of borrowing is that the lender is not involved with how you spend the money. They won’t question how you choose to use the money and won’t put restrictions on its use.
With other types of loans, the lender will often limit what you can do with the money. If you need money for something they don’t “approve” of, you won’t get the loan even if you qualify for it.
How Payday Advance Loans Impact Your Credit Score
Another advantage to payday loans is that, since they don’t require a credit score, they don’t often affect it either. Payday lenders don’t generally report these loans to the credit bureaus so it won’t be present on your credit report.
Applying for credit creates a so-called hard inquiry, which can cause your credit score to drop slightly, especially if it’s already low, or if you don’t get approved for the loan. With payday loans, that won’t be of concern at all.
It’s worth mentioning that this works both ways though. A payday loan won’t improve your credit score either, even if you pay it out immediately.
The Consequences of not Paying Back Bad Credit Loans
Most loans require some kind of security, or collateral, from the borrower. If the payment is not made, the lender can seize the security as a way of recovering their money.
Because payday loans for bad credit don’t require any security, this won’t happen if you don’t make your payments. But that doesn’t mean there aren’t consequences.
If a borrower defaults on a payday loan, the lender will usually send it to a collection agency. In extreme cases, legal action can be taken. In either case, this will have a negative impact on your credit. Once a debt goes into a collection, it will get reported to the credit bureaus.
Having this show up on your credit report is obviously a negative thing which will cause your score to drop. Not to mention the added costs and stress of having to deal with collectors and lawyers. To avoid these troubles, remember:
Unlike the money you earn, the money you borrow isn’t yours, so treat it accordingly.
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