I heard that taking out a payday loan can help rebuild my credit or improve my credit score. Is this true? | Consumer Financial Protection Bureau (2024)

FAQs

I heard that taking out a payday loan can help rebuild my credit or improve my credit score. Is this true? | Consumer Financial Protection Bureau? ›

Typically payday loans do not report to credit unless you fail to pay as agreed in which case they are likely to send it to collections which would negatively impact your score.

The answer, alas, is no, because lenders that offer payday loans usually don't report payment details to the three main credit bureaus that compile your scores. If the bureaus don't know about your payment, your credit scores can't improve.

Payday loans generally are not reported to the three major national credit reporting companies, so they are unlikely to impact your credit scores. Most storefront payday lenders do not consider traditional credit reports or credit scores when determining loan eligibility.

The correct statement about payday loans is that they are harder to pay back because of high fees and high interest rates. Payday loans are a form of short-term borrowing that comes with high cost, usually a percentage of the amount borrowed, which makes them costly overtime compared to traditional loans.

​​Payday loans offer a fixed interest rate rather than a variable interest rate. That's because repayment of the cash loans are expected to be in the form of one lump sum.

Understandably, one of the most common questions is “do payday loans affect your credit score?” Generally speaking, the answer to that is no, they don't; however, it is possible for payday loans to negatively impact your score if left unpaid.

Payday Loans Are Very Expensive – High interest credit cards might charge borrowers an APR of 28 to 36%, but the average payday loan's APR is commonly 398%. Payday Loans Are Financial Quicksand – Many borrowers are unable to repay the loan in the typical two-week repayment period.

But because of their high borrowing costs, these services could do more harm than good. Annual percentage rates for short-term payday loans, for example, are determined by a patchwork of state-level restrictions, and payday loan APRs frequently reach three figures—in some cases, four figures.

Payday loans can be a way for consumers to access cash quickly when they need to cover their immediate expenses and can't wait until their next payday. However, these loans come at a cost and can lead to a vicious debt spiral.

They are treated in exactly the same way as an overdue credit card, finance agreement or long-term loan. If you repay your payday loan on time and with no issues, it will stay on your credit report for up to 6 years, depending on the credit reference agency.

What's the easiest loan to get approved for? ›

What is the easiest loan to get approved for? The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.

Payday loans are rarely a solution to financial problems. These loans are designed to trap you in a cycle of debt – it's true. The fees are so high that while the loan might help you make it to payday, by the time you get there you will probably find yourself short on money and need to take out a new loan.

Those who are underbanked or don't have access to a traditional bank account. Recent immigrants, undereducated individuals and those of Black or Hispanic descent. Young adults who took out student loans.

Payday loans are considered a form of “unsecured” debt, which means you do not have to give the lender any collateral, or put anything up in return like if you went to a pawn shop.

Payday loans are hard to pay off because the interest rates are extremely high, sometimes as much as 400%, meaning that the amount you owe can balloon quickly when you can't pay them off immediately. Many borrowers take out additional payday loans as a result.

The term "payday" in payday loan refers to when a borrower writes a postdated check to the lender for the payday salary, but receives part of that payday sum in immediate cash from the lender.

They are expensive

For one thing, payday loans are sometimes very expensive. Some lenders apply interest rates of up to 1,500% APR, and this can cause the total cost of borrowing to spiral.

The more payday loans you have on your credit file, the trickier it'll be to get accepted for a mortgage. Taking out lots of payday loans can signal to a mortgage lender that you struggle to make ends meet, and that you're more likely to default on your mortgage payments.