Millions of Australians take advantage of payday loans which lands many people in uncontrollable debt. High-interest rates and high levels of risk are often associated with payday loans and are a wage advance downside. This doesn’t even account for the variety of fees that cause financial difficulty when taking out a loan.

While these options can be helpful and can offer good ways to get quick funds when you need them, there are some common misconceptions you’re going to want to know about.

Are you considering a payday loan or wage advance? If so, you should be aware of the potential credit implications. Both of these types of loans can have a negative impact on your financial health and also more specifically, your credit in some cases, which can make it more difficult to obtain financing opportunities in the future.

Wage Advance Loans Can Be Harmful

A paycheck advance loan is a type of short-term loan that you can use to borrow money before your next paycheck. It is exactly as it sounds. In short, you’re borrowing money from yourself. Or, in other words, you’re getting a portion of your next check early.

The lender will often require that you provide proof of employment and your payment schedule in order to qualify. The loan amount will be based on what you’re eligible for and the lender may also charge a fee for the service.

These loan types rely on cash flow to your bank account instead of doing a credit check. However, keep in mind that missed payments or nonpayment, in general, can go reported. One of the potential risks of taking out a wage advance loan is that it can have a negative impact on your credit.

This is because it increases your overall debt-to-income ratio, which is a key factor that lenders consider when assessing your creditworthiness. A high debt-to-income ratio can make it more difficult for you to obtain financing in the future, even if you have a good credit score.

How Exactly Does the ”Payday Loan” Concept Hurt Your Credit?

When you take out a payday loan, you are essentially borrowing a small sum of money for a short period of time. In most cases, these loans must be repaid in full within two weeks or less. The idea is that you will be covered with the funds you need between paychecks.

This means that you won’t have to pay back what you borrow until you are paid again and that money will be deducted from your deposit. So, with these types of loans, they don’t directly affect your credit because typically speaking, these loan types aren’t reported to the three national reporting companies.

Overall, on their own, they aren’t likely to affect your credit score. However, the things that stem from these loans, especially multiple payday loans at once, can cause a string of issues down the line which can harm your credit.

More on the Effects

Only 14% of the people that take out these types of loans are able to pay them back. Aside from the probability of being able to successfully pay the loan off within the time that you’re given they cause other problems as well. To name a few, payday loans can cause borrowers to start and fall farther into a debt cycle.

Other than the high and frequent fees, they aren’t the best option if you want to borrow funds to make a large purchase. The main issue with the payday option is not being able to keep up with the repayment schedule. Do you know what happens when you can’t pay them back?

It’s reported and ends up on your credit score. The additional issue is that this type of problem can affect your credit for a long period. They often sit on your credit report for at least seven years.

Because payday loans have very high-interest rates and short repayment terms, they can be expensive to repay and this is what causes a ripple effect of debt drawing. If you cannot afford to repay your loan in full, you may end up rolling it over into a new loan or consistently applying for another after repaying the initial loan.

Think About the End-Results

Overall, some of the end results of payday loans can make it difficult to obtain other forms of credit to help build credit in the future. While many people think that this is the best loan option for those with bad credit, it can over time be the cause of it if you fall behind on a payment or don’t pay your dues at all.

The reason this is such an issue is that small loans like payday loans are often meant for smaller purchases and larger loans are meant for larger purchase options. However, consistent payday loan borrowing affects the chance that many consumers have to make purchases on large items.

Keep in mind that the market size of payday loans has been valued at $32.48 billion in 2020 alone. This shows how in-demand they are considering what the market itself is worth. This is a wage advance downside and is often the start of consumers spiralling into debt.

Do You Want to Make Large Purchases? A Payday Loan May Complicate Things for You

A payday loan does not make the best option if you’re looking to make a large purchase. This type of loan is designed for short-term use, so it may not be the best choice if you need funds to cover large expenses or payments for something that you want to stretch over time.

Additionally, as we mentioned, a payday loan may not offer you the best interest rate or terms, which could complicate your financial situation even further. If you’re considering a payday loan to make a large purchase, it’s important to weigh all of your options and consider the potential consequences.

What’s often better is to use an online lender for what you’re trying to buy. Take a new car for example.

The lender will often work to get you into the car of your dreams and oftentimes, their lending programs will be designed to be both convenient and effective for the consumer of the product they focus on. This is often a good thing for many consumers because their loans are geared toward what they plan to purchase. 

The Main Wage Advance Downside and Problems with Payday Loans

There are a few main reasons why payday loans should be avoided. The high-interest rates are one of the reasons that deter many people from these loan types. While they make for great resources with fast cash, you almost always end up paying for more than you borrowed.

Payday loans often have extremely high-interest rates, which can quickly add up if the loan is not paid back on time. The short repayment terms can be trying for many borrowers and this is especially true if you have to take out more than one cash advance at a time.

Payday loans usually need to be repaid within a very short time frame and this is often over a few weeks which can be difficult for people who are already struggling financially.

The high fees are another issue. Payday lenders often charge high fees for their loans, which can add up quickly.

The risk of default is also something else to consider. If a payday loan is not repaid on time, the borrower can often end up owing a lot of money in fees and interest or risk issues with their credit.

On top of all of this, these loan types are predatory in nature and overall, they’re expensive. When you think about it, a standard two-week loan is going to cost almost as much as what you borrow.

You will often see upwards of $100 in fees alone. Additionally, the average annual percentage of these loan types can reach almost 400%.

Get a Finance Option That Works for You, Not Against You

Payday loans and wage advances provide a great short-term solution to people with no available or challenging credit. The thing is though, there is sometimes a wage advance downside and there are often better alternatives that will give you less long-term risk and allow you to make larger purchases.

If you’re in the market for a new car and you’re looking at your spending, you’re going to want to work with C1 Car Loans. All it takes is a quick 10-minute application process to get pre-approved.

Contact our team today to learn more and explore while protecting your finances.