The short term, or “payday” loan as it is popularly called, has come in for much criticism in recent years. These have grown in popularity in many countries around the world, despite the warnings of what happens if you do not pay on time, and stories concerning individuals who have ended up paying thousands on even a small, nominal amount of borrowing.
Part of the marketing strategy of the businesses who offer these short term loans is that you can get one even if you have a poor credit rating, and that paying off regular short term loans on time will see your trust rating build over time. This claim is obviously an attractive one, particularly to individuals who have struggled financially in the past, and may use a payday loan simply to rebalance finances so they can move forward in a more positive manner.
However, some of the negative, long-term connotations of taking out short-term loans are now becoming known.
Are Adverts Misleading?
In some respects, the adverts for short-term loans are completely misrepresenting credit scoring. To state that taking out and repaying a short-term loan on time will improve your credit score is an ambiguous statement at best.
While it will prove that you are indeed a reliable borrower over a smaller period of time, it is also an indicator that you are perhaps a little unreliable with finances in general. Although your credit report will never say that, this is the message that any other lenders will likely interpret when they come to assessing you.
If you stick to short-term payday loans, you have probably thought that is fine, because you likely do not need any other form of finances. But what do short-term loans have the potential to negatively influence?
· Mortgage agreements – If you have been seen to be using short-term loans as a financial solution, then consider whether you will be seen as a reliable long-term borrower for a large commitment such as a mortgage.
· Hire purchase agreements – Buying a car is not cheap, which is why hire purchase agreements are more popular than ever before. Similar to a mortgage agreement, this is a long-term commitment that you will need to prove you can regularly meet – short-term loans are proof that you will struggle here.
· Even when you book a holiday you will need to prove you are good for the money, so if sun, sea and sand is your thing you may want to avoid the payday loan.
Although payday loans are clearly helpful, they should only be made use of as a last resort. Too many people around the world casually live beyond their means and simply fall back on a payday loan solution. The many firms who offer service charge discounts and reduced rate promotions are frankly not helping the situation, either. While a short-term loan can help to boost certain aspects of your credit score, they can have serious long-term implications on your ability to secure finance.
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