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Why Payday Loans Hurt, Not Improve Credit Score

Learn how to manage your funds responsibly to avoid payday loans

Posted on: August 19, 2016

Learn how to manage your funds responsibly to avoid payday loans

When you take out a certain type of loan, you want to be sure that it won't affect your ability to borrow in the future. With credit enquiries staying on your history file for five years, it's always important to exhaust all other options before taking out a pay day loan.

Many credit lenders do not allow payday loans, but there is a select few that do although these loans may eventually hinder your chance at getting a loan for a car or a house in the future. When lenders take your application for any form of a loan, they trawl through your history and make sure that you are a 'solid investment' e.g. able to make your repayments on time. It is important to remember that personal loans are always questioned by lenders and if it is a payday loan, you can be at risk of missing out on future credit for bad money management.

Payday Loans and Your Credit Score

Every loan application will come with its very own credit score of how the applicant is fairing with regards to their financial situation. Defaults, bankruptcy, and inability to keep a repayment schedule all affect your credit score, which in turn affects your chances of being approved for a future loan.

With the case of most motor vehicle financiers/lenders, obvious alarm bells on an application would be many personal loans for quick cash. This implies that they cannot handle their money if they are applying/approved for consecutive payday loans and the risk factor rises substantially. If you're history does, however, show an ability to repay quickly according to a schedule, then you will be seen as less of a risk.

The major problem with young people applying is that once you get your financial status in order, it's time to get a mortgage or upgrade your car and a loan will be essential. When the lender searches through your credit file, alarm bells will sound if there is a continuing reliance on these loans and the chances of being approved could be slim.


Another unfortunate aspect of payday loans is that the quick cash aspect carries frightening interest and fee charges. Some loans (granted they may only be a two-week $100 loan) can carry huge fees, which is just throwing away your money. Payday lenders are, however, regulated and monitored by the government in order to avoid irresponsible lending.

For loans up to $2,000 (Small Amount Credit Contract or SACC) with terms of between 16 days and one year, lenders cannot charge more than the following fees:

  • 20% establishment fee of the principal amount you borrow
  • 4% monthly fee of the principal amount you borrow

For a larger loan (Medium Amount Credit Contract or MACC), an interest rate can be charged but guidelines must be followed.

  • Up to $400 as an establishment fee for a loan between $2,001-$5,000 and term of 16 days - two years
  • Maximum of 48% interest for a loan between $2,001-$5,000 and term of 16 days - two years

If you do happen to fall behind on your loan, you will then face late and account keeping fees which will only add up. Not exactly ideal for a quick cash fix.

BUT, it's not all bad

Surprisingly, however, a payday loan can be seen as a positive to credit lenders IF you meet your repayment obligations and have a clean repayment history e.g. no overdue payday loans. You could then be seen as a reliable borrower (but only for this type of financial product).

So, always consider your own personal financial situation when taking out a payday loan. Remember that the principal amount is not all you'll be paying and consider whether it is worth it with regards to being approved for future, more substantial loans.

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