Lady test driving a vehicle before obtaining a bad credit car loan Lady test driving a vehicle before obtaining a bad credit car loan
Lady test driving a vehicle before obtaining a bad credit car loan

Customers often ask us if having a payday loan will negatively affect their chances of getting a car loan. The short answer to this question is YES!

In this article, we’ll help you understand the world of payday loans exactly what they are, how they can affect you personally – and how they negatively impact your credit assessment when you apply for a car loan.

What are Payday Loans?

A payday loan is a short-term loan that can range from $300 – $2,000. Technically there’s no interest applied to this type of loan, also known as a Small Amount Credit Contract (SACC). Payday lenders make their money by charging the following fees:

  • Establishment fee: A maximum of 20% of the loan amount borrowed
  • Monthly fee: A maximum of 4% of the loan amount borrowed
  • Dishonour fee/ Missed payment fee: The amount varies, typically $25-35
  • Default fees: If you don’t pay by the due date. The maximum recoverable amount is 2x the borrowed amount.
  • Enforcement fees: This is a debt recovery fee and can vary quite widely

Despite only being classed as ‘fee based’ loans, or ‘no interest loans’, it’s easy to see that the cost of borrowing is very high at 48% per year. While this kind of debt is easy to get into, it can become an expensive and ongoing spiral of debt for borrowers.

Why are Payday Loans a Problem?

The best way to explain the problem is to look at the numbers. Let’s assume you borrow $1,000 to be fully repaid in 6 months:

  • Total borrowed: $1,000
  • 20% establishment fee: $200
  • 4% monthly fee: $40 x 6 = $240
  • Total repayable amount: $1,440
  • Weekly repayments: $55.38 x 26 weeks

So, to borrow $1,000 you’ll need to pay back $1,440. That’s steep, paying back $440 per $1,000 is expensive in anyone’s books!

While it may seem like the only option available to get out of a financial bind, it could make your financial situation far worse. It’s an expensive form of credit that many people get trapped in. Even if they do pay out the loan, people often get offered a new payday loan with more money on offer, and the cycle continues again and again.

Our advice – really – and we mean REALLY think about the risks before you take out a payday loan.

We still need to look at how payday loans affect your credit score when you enquire about a car loan.

How Do Payday Loans Affect My Credit Assessment?

Your credit score is very important when it comes to applying for a car loan. Payday loans will automatically raise a red flag with any credit analyst who assesses your loan application.

Your Credit File

Like any other form of consumer credit, payday loans will show up on your credit file. It’s all there for any credit analyst to see how much you borrowed, your repayment history (including payment dishonours and defaults), and how many times you’ve applied for credit.

The yarn that payday lenders will spin is that if you pay the loan off as planned, it will help your credit score by showing positive credit behaviour. That’s a myth. This type of credit is seen as a loan of last resort and is considered a significant risk factor by automotive lenders. The more payday loans you have, the higher the perceived risk. The probability of your loan being declined is very high if there is evidence of payday loan activity on your credit file.

Your Banking History

Car loan credit analysts don’t just rely on your credit file when assessing your credit worthiness. They will also look at your banking history. Modern lenders use cutting edge technology to drill down into the fine details of your banking conduct – and be assured they will see every aspect of your payday lending activity. Once again, evidence of payday loan activity throws up a big red flag. It’s worth noting that banking conduct analysis looks at a lot more than payday loan activity – so stay tuned, we’ll make that information available to you in an upcoming post.

What To Do Next

If you don’t have a payday loan, keep it that way. It will go a long way to helping your application for a car loan.

If you do have an existing payday loan, make it your number one goal to repay the loan in full – then wait 90 days before applying for car finance. Your patience and diligence will ensure that your application looks a lot healthier to a credit analyst. No payday loans, no red flags!

Need help?

Talk to one of our friendly lending specialists at Fox Finance Group. We’re here to help you find the right finance for your situation. While car finance can often be approved in a single day, it could also require guidance, patience and preparation. Our team can advise you on what to do when you’re not quite ready, so you can apply for a car loan when you have the best chance of being approved.

Contact us online or call us today on 1300 665 906

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