Payday loans are small emergency loans aimed at helping you tide over during financial problems. Unforeseen expenses catch you unawares at any moment, and it is likely that you do not have sufficient savings to fall back on to meet them. Payday loans widely gained acclaim because of the instant injection of cash they provide, and your poor credit score does not get in your way.

Payday loans are typically aimed at subprime borrowers. They usually involve no credit checks and, therefore, carry high interest rates. The annual rate could be up to 1500%, which can easily trap you in an ongoing cycle of debt. The risk of falling into an abyss of debt is significantly high due to a short repayment length. You are generally required to discharge the debt on your next payday. If any lender offers you an instalment plan, they will quickly complete the settlement of the debt in one month.

Payday loan lenders use their own approval policies. While according to the FCA guidelines, every lender is obligated to check your credit score before approving your loan, some lenders skip this part. It is partly because the amount is too small, not more than £500, and partly because lenders already know they are bad credit borrowers, so there is no requirement to check their credit reports.

But there is a lot more you need to know about these loans. You will be astounded to know payday loans reflecting on your credit report might diminish your chances of being qualified for personal loans and mortgages, albeit on-time payments.

Non-payments will be reflected

You could potentially be borrowing money from a payday lender who approves based on your income sources. Such lenders usually emphasise your repaying capacity rather than your past payment record. In case of a sound financial condition, you will more likely be given the nod. Since payday loans do not appear on your credit file, they will not have direct implications on your credit rating, thereby hanging a tale.

It is assumed that you will pay off your debt in fell one swoop on the due date. A default will be reported to credit reference agencies even though it did not involve a credit check at the time of the application process. Once the default is recorded on your credit file, its damaging effects will be borne by you in the next six years.

Not only will your credit score be ruined, but you will also struggle to qualify for lower interest rates down the line. People do not bother about the long-term implications of payday loans because they are deemed to be settled in one go. Unfortunately, the total payable amount is so high that they end up rolling over the debt. An affordable payday loan is actually not affordable any more. It can throw you into a deep hole of debt.

Personal loan deals will be expensive

Do not forget that personal loans are unsecured and, therefore, charge high interest rates. Even if you do not feel inclined to borrow a larger sum, a credit check is ineluctable. If lenders find your credit file is not up to scratch, they will be reluctant to approbate your loan. However, some lenders might be willing to sign off on your application in case of a strong financial well-being, but despite that, you will be charged exorbitant interest rates.

Borrowing a large amount of money is not a cinch when your credit rating is less than perfect. As there is a huge risk of falling behind on payments, lenders will refuse you. Applying to many lenders within a short period in order to get the nod will further damage your credit rating, dwindling your chances of approval in the future.

Payday loans, despite on-time payments, are not good

Some payday lenders check your credit score at the time of application. As a result, they are recorded on your credit report. It is worth noting that on-time payments are not reported to credit reference agencies, but defaults will be. Because payday loans do not last more than a month, they do not give clarity about your loyalty despite the financial ups and downs.

From this scenario, you may divine that as long as you discharge the whole debt on time, your credit profile is remarkably impressive. Unfortunately, this is contrary to reality. Meeting obligations towards payday loans can preclude you from losing your credit points, but not from exorbitant interest rates.

Most of the lenders do not appreciate the record of payday loans on credit reports. They will not consider you a reliable borrower. It signifies that you are not good at money management. It is normally assumed that such people are incompetent at money management. Unfortunately, this will result in expensive personal loans. If you are applying for personal unsecured loans for poor credit, they will be even more expensive.

The right time to apply for personal loans when you already have payday loans

You should avoid taking out an unsecured loan if you have an unpaid payday loan. Your credibility will be questioned otherwise. Make sure you do not have any debt obligation, especially payday loans while seeking approval for unsecured loans. Having a payday loan will not always result in refusal, but it will attract high interest rates.

Ideally, payday loans should be at least one-year-old because they insinuate your capability of managing money without relying on small emergency loans. It is a good idea if they are two years old or older if you are looking to get a large personal loan or mortgage.

The appropriate time to apply for personal loans is when:

• You have not recently taken on a payday loan.
• You are completely confident about your repaying capacity.
• It is a necessity, or you need money for an unavoidable reason.
• Your credit report is up to scratch.

The final word

Undoubtedly, payday loans affect your borrowing capacity. Too many of them on your credit report will reflect your poor money management skills. Lenders will either restrict you from borrowing a desirable sum or they will charge high interest rates.

It is always counselled that your credit report should have no record of payday loans at the time of taking out unsecured loans. If you applied for payday loans in the past, make sure that they are at least over a year old. The older, the better.

However, their absence from your credit file does not guarantee that you will qualify for an unsecured loan at an attractive interest rate because your overall credit profile matters, which includes your credit score and income sources.