We sometimes get asked about payday loans and debt consolidation.
Payday loans are short-term loans where an individual can borrow funds needed to cover unexpected expenses until the date of their next paycheck. While this can seem like a tempting solution to a temporary cash flow problem, these loans often carry high interest rates, and can quickly turn into a case of mounting debt if not paid back within the first pay period.
How Payday Loans Affect Your Credit
Although payday loans themselves do not typically appear on your credit report from the 3 major credit reporting companies, they can be sold to collections if you become delinquent. Once a collection agency purchases the debt, they may then report the collection account to the credit reporting companies, and the debt will then appear on your credit reports. There may also be payday lenders who will file lawsuits for unpaid loans. In this case, if a claim is awarded to the payday lender, then it could appear on your credit reports as a judgment and negatively impact your credit. Some lenders may also use reporting information from specialty organizations that may collect payday loan histories.
Options for Payday Loan Relief
Debt consolidation is one option that can help people recover from growing payday loan debt, or other debts. However, the term “debt consolidation” may refer to at least two different things. One should not hurt your credit scores, the other almost definitely will.
What is the Difference between Debt Consolidation and Debt Settlement?
One way to consolidate your debts is to apply for a debt consolidation loan. The bank will make one loan that you use to pay off the other loans in full. A consolidation loan is usually at a lower interest rate but over a longer period of time.
Because it has a lower interest rate and longer repayment term, a consolidation loan will have a lower monthly payment, helping you manage the debt repayment. Additionally, the debts it was used to pay off will show as “paid in full” in your credit report, which is considered positive.
Debt settlement plans are also often marketed as debt consolidation. In this type of consolidation, you make one payment to a debt settlement firm that then distributes that amount among your lenders. The debt settlement firm negotiates settlement of the debts you owe for less than you originally agreed.
The accounts will be shown in your credit report as “settled,” indicating they were not paid in full and as agreed under your original contract. For that reason, settled debts will hurt your credit scores.
Additionally, many debt consolidation programs require you to be past due on your payments before you can qualify. If you are not already past due, allowing yourself to become late on your payments in order to qualify will have a significant negative effect on your credit.
Choose a Reputable Company
Before entering into a debt consolidation program, make sure to thoroughly research the company you are considering. Understand exactly what kind of program or loan you are entering into.
Keep in mind that you will still be responsible for making sure all the payments are made on time.
If the company you are using to make payments on your behalf misses a payment or fails to make payments, those late or missed payments will likely be reported as part of your credit history.
Thanks for asking.
The “Ask Experian” team