Also known as cash advances, payday loans are the most popular form of unsecured loans. The other types of unsecured loans include guarantor loans and peer-to-peer loans. In all other types of loans, the lender requires to show collateral for loan approval. For example, the guarantor operates as the collateral in guarantor loan. The relationship is considered collateral in peer-to-peer loan.
Payday loan is the only type of loan that does not require submitting collateral. The borrowers can get payday loans by showing a copy of their credit report, even with bad credit score. However, not every person has a bank account or good credit score. Here, we will discuss the impact of payday loan on people with bad credit score and the worth of bank in obtaining a payday loan.
The Worth of Bank Account
Many people live pay check-to-pay check lifestyle. There is no shame in living such a life. However, if you live on pay check-to-pay check and do not have a bank account then it clearly means that you do not have enough savings. The payday lenders prefer people with bank accounts because they can assess the chances of loan repayment by obtaining the credit report of such borrowers.
The lenders believe that borrowers, who do not have a bank account, make the repayments either by borrowing money from someone else or saving from their pay check. For lenders, this kind of scenario shows lesser chances of loan repayment.
Many lenders provide payday loans to borrowers without bank account. For them, the benefit either lies in the increasing national demand of payday loans or high interest on the payday capital. So what is the worth of a bank account in payday lending, you ask?
A bank account is certainly important for getting a payday loan. You can negotiate on the annual percentage rate, making your creditworthiness as foundation of your argument. Furthermore, the lender will also be interested in your profile as the chances of loan repayment are vital by utilizing credit card loan.
Credit Score and Payday Loan
Your creditworthiness is the key player in loan application approval. You can negotiate on the interest using your creditworthiness. People use payday loans for following purposes.
- People with good credit score use payday loans to maintain their creditworthiness. When they repay all loans, their creditworthiness starts decreasing. Generally, a month with no repayment of loan reduces the creditworthiness by at least 10 points. If it continues, the creditworthiness falls from Excellent to Good, and from Good to Fair. Ultimately, the creditworthiness will fall in Poor credit score category. This kind of risk is dangerous, especially if you are close to the retirement years. Therefore, people take out short-term payday loans, for around a month only. When they make the repayment, their creditworthiness not only maintains but it also keeps improving.
- Many people use payday loans to fulfill their financial need. People may use payday loans to pay the utility bills, which is a bad idea. A payday loan should be taken in serious emergency only because it has serious impact on your creditworthiness.
Payday loan is not mentioned in your credit report if you repay it punctually. However, if you miss a repayment, it will be mentioned on the credit report. Your credit score may fall by 30–50 points. The effect of payday loan may be higher than 50 points. This happens when the credit score of borrower already falls in bad or poor credit score category. If the borrower become defaulter on payday loan, the creditor agencies; Equifax, Experian, and TransUnion would enter the effect.
What Would Happen if You Close Your Bank Account?
The bank works as a third party in the payday loans. The lender will get in touch with you to receive the loan repayment. If the borrower does not reply or denies repaying the loan then the lender will definitely approach the third party i.e. the bank. This is why, many people close their bank accounts to avoid legal complications. Now, here is an important thing to understand. The bank operates as third party but as your dependent i.e. the bank will work according to your request. If you feel that you are unable to make the repayment then contact your bank and ask them to stop the transaction. The lender cannot force the bank to take money from your account if you have stopped the transaction. Furthermore, make sure to contact the lender and ask them to settle the case outside the court. The lender will ask you to sign a new loan contract and repay the capital + interest on first capital + interest on capital and its interest. Simply put, closing the bank account will not help you in any way.
What Happens When You Don’t Have Money in the Bank?
The concept of rollover applies when you do not have money in the bank. Payday loan repayment is an automated transaction. The lender receives the money as soon as the salary arrives in your account. You can stop the transaction before arrival of the salary. In worst circumstances, your employer may not process your salary. Now, you have to repay the loan while you do not have money for fulfilling the basic needs.
Following are the solutions for you in this situation.
- Inform the lender that your salary has been seized due to unknown reasons. Confirm that you will repay the loan amount as soon as you receive the salary.
- Secondly, focus on your primary needs instead of worrying about the payday loan. It will work according to rollover strategy. Your loan repayment will automatically rollover to the next month’s payday.
Payday loan has a strong relationship with your credit report and bank account. It is important to understand this relationship before taking out a payday loan. You can visit Quiddi Compare for further information regarding payday loan and its impact on different financial sectors of your life.