Do short term loans affect your credit rating?

Every now and then we all need a little financial help – maybe you hit a pothole and you need a new tyre, or you just secured a new job and you need a season ticket before you receive your first pay cheque – there’s all sorts of reasons we face a cashflow shortfall throughout the year.

A common way for people to help manage their cashflow issues is with a short term loan. Short term loans, often known as payday loans, bridge the gap between your paydays when you come across an unexpected expense. Typically, you can borrow a loan for any length of time between 1 day and 6 months and you can borrow any amount up to £1000 with some lenders.

Why is my credit file relevant when I apply for a short term loan?

Whenever you take out credit, whether it’s a mortgage, a bank loan or just a payday loan, the lender runs a creditworthiness and affordability assessment to make sure you can afford to repay the loan, and that lending money to you is a responsible decision. Part of the assessment includes a credit check. The lender looks at your credit file to see your borrowing history with other lenders and to see if you’ve repaid previous loans on time and in full.

A lot of payday lenders know that your credit file might not be brilliant, so they won’t reject your application based on your credit score alone. However it does form part of their assessment and so it’s good to try and improve your credit rating where possible.

How does a short term loan affect my credit rating?

Application

When you make an application for a short term loan, the application itself will be recorded on your credit file whether it’s declined or approved.

During the loan term

If your application is approved, ensure you make your repayments on time and in full. Missed payments will be recorded on your credit file so even if you have to set reminders – make sure you make your payments on time! If you have any difficulty making your payments, get in touch with the lender to arrange an alternative repayment option.

Once settled

Once the loan is settled, the loan record will be updated to settled on your credit file, although this can sometimes take the credit reference agencies up to a month to update, so don’t panic if it doesn’t show as settled immediately on your credit file. If you agree a partial settlement with your lender, it will be recorded as partial settlement – not as settled in full, and future lenders will interpret this differently, so it’s a good idea to try and pay in full where possible.

What can I do to avoid negative markers on my credit file?

Generally, if you make your repayments on time, in full and avoid taking out too much credit at one time (even if you can afford to repay it), you should avoid any negative information being recorded on your credit file.

If you can’t make your repayment on time – maybe another emergency expense arose – get in touch with your creditor to rearrange your repayment as soon as possible. A payment arrangement will show on your credit file, but as long as you make your alternate payments on time, it should look better than an overdue or unpaid loan.

If you don’t repay your loan on time and leave the account overdue for some time, the lender will eventually apply a Default to your credit file and this will show as a negative to any other lenders you may want to borrow with in the future. A Default will show on your credit file for six years. You will normally receive some form of correspondence (either email, text or typically a letter) before the Default is applied, so make sure you engage with your creditor at that stage if you haven’t already.

Will a loan comparison site show on my credit file?

Some brokers will run credit checks before passing you onto a lender and this credit check can either be a soft search or a hard search. A soft search won’t show on your credit file, but a hard search will – which check the broker does can usually be found on their website or in their FAQs section.

At Clear and Fair, we don’t run any kind of credit check when filtering the results for your loan search. We will simply show the creditors who offer the loan product you are looking for based on the loan duration and loan amount that you have entered in the search. We don’t request any personal information from you in order to process your enquiry, and so searching for a loan with Clear and Fair will not show on your credit file until you actually apply for a loan directly with one of our lenders.