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Car Loans And How Payday Loans Affect Your Credit Score

Chris Hopkins
Aug 9, 2021 9:43:11 AM

Did you know that applying for and taking out payday loans can have a negative impact on your credit score?

When it comes to applying for a car loan your credit score matters and one thing that can potentially damage your chances of approval are payday loans.  

In today's post, we walk you through everything you need to know about payday loans. We share with you exactly how lenders view payday loans and give you our top tips to ensure that payday loans don't stop your car loan application from being declined. 

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What is a payday loan?

A payday loan is a short term, high-interest loan, that allows you to borrow up to $2000. Designed as a fast, stop gap solution to help people overcome financial difficulties until their next pay day, the reality is the term of the loan can be anything from 16 days to 12 months.

Also, don't let the idea of quick easy finance fool you. Payday loans are full of traps that can see you caught in a never ending repayment cycle that not only keeps you broke but heavily impacts your credit score. The reality of payday loans  is that they are loaded with terms and conditions which actually make them potentially very expensive. The combination of interest rates, fees and charges can see you paying as much as 48% interest over the term of the loan. 

Here's a breakdown of the maximum fees and charges a lender can charge you.

Establishment fee  maximum fee is 20% of the amount borrowed
Monthly service fee maximum fee per month is 4% of the amount borrowed
Government fee Monthly service fee covers any government duties — most lenders don't charge this
Dishonour or missed payment fee charged if you don't have enough money in your bank account to make a scheduled repayment
Default fees charged if you don't make a repayment by the due date — the maximum you can be charged for default fees is double the amount you borrowed
Enforcement expense charged if you default — to cover the cost of recovering the money you owe


How much does a payday loan really cost? 

Let's look at an example to illustrate the true cost of a payday loan if you were to borrow the full amount of $2000 and spread the loan repayments over the maximum term of 12 months.

  •  Amount borrowed:$2,000.00
  • Establishment fee: (20% of the amount borrowed) $400.00
  • Monthly fees: ()$960.00
  • Total to be repaid:$3,360.00
  • Fortnightly repayments: (26 payments)$129.23

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Do payday loans affect your credit score?

The short answer is yes. Payday loans, like all forms of credit, are recorded on your official credit report, but what does the lender viewing your credit report actually see and how can this impact your chances of getting approved for a car loan?

If you apply for or take out a payday loan it will show in the consumer credit section of your report and show the number of credit inquiries you have made, the type of credit approved, the date of application and or approval, the amount you borrowed on the payday loan and your payment history including defaults and or missed payments. 

Payday lenders will tell you that taking out a payday loan can help your credit score, however, in most cases, it has a negative impact. In fact according to Belinda Diprose, at Equifax, the weight placed on a payday loan when it comes to "risk factors" for your credit score is different to other types of loans.

There are a number of dangers or credit score risks with payday loans, but before we explore the risks, is there an upside to payday loans. 

Can payday loans help my credit score?

The truth is no. While payday loans are a form of credit,  making the assumption that good payday loan management can assist in improving your credit score by helping you, the borrower, demonstrate good credit habits simply doesn't hold water with most lenders. Even if you ensure that the loan amount is paid in full during the term of the loan and all repayments are paid on time, payday loans leave a negative mark on your credit file.  

Do payday loans negatively impact my credit score?

While payday loans can help you out of a difficult financial situation, generally speaking, payday loans are seen as negative. There are many risks with this high-cost loan option and many who take out payday loans fall victim to the demanding repayment schedule.

What are the risks with payday loans?

Firstly, payday loans are usually an action of last resort and indirectly indicate to potential lenders that you may be struggling to manage your finances.  More importantly, applying for several payday loans, being refused by lenders, defaulting on payments or missing repayments will all negatively impact your credit score and make it more difficult to qualify for a car loan. 

payday loans advice

Our advice on payday loans and car finance

Our advice is simple, where possible avoid the temptation to apply for a payday loan. The big temptation trap of payday loans is the automatic requalification for another payday loan on discharge of your existing payday loan. When lenders see multiple payday loans it raises a red flag about your ability to manage your finances. As a general rule, most lenders will decline a car loan application if they see multiple payday loan enquiries.   

The terms also make payday loans a very expensive option. The high repayments often impact the borrower's ability to meet the loan repayments, resulting in defaults and damage to your credit score, which in turn affects your ability to get approved for a car loan.  

Finally, If you are looking to secure finance for your new car and you have existing payday loans make sure you make all of your repayments on time and where possible try to pay out the loan at least 3 months before submitting a car loan application.

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