Payday loans, credit rating and trust deeds

Payday loans are now more common than ever. More and more people are turning to this form of lending because they are unable to make it through the month without obtaining credit. Payday loans increasingly form a part of the debts listed on trust deeds , which is partly due to the high levels of interest charged. People are struggling to repay the loans when their next payday comes along. This often results in the debt rolling forward to the next month and higher interest charges being applied.

R3 insolvency group state that 45% of the 2000 people they interviewed admitted to struggling to stretch their money out until payday, with 60% claiming to be genuinely worried about their level of debt. When debts become unmanageable, trust deeds are often considered by residents of Scotland. Debts from payday loans usually only add up to a few thousand pounds due to the relatively small amounts lent by these firms, but it’s fairly common those needing to use payday loans will have other debts too. When grouped together, trust deeds can become one of the only options left available to those with multiple payday loan debts.

One common query focuses on whether payday loans have a negative effect on an individual’s credit rating. Experian, the credit referencing agency, recently answered this question on their website. Their answer overall is ‘no’, however they did warn that lending from a payday loan company can be seen as a sign of financial difficulty, and therefore other lenders may refuse credit based on this need and activity (rather than on the credit rating itself). Of course those people already in trust deeds due to overwhelming debts, sometimes including payday loans, often say that a credit report rating is the least of their concerns if there is a need to borrow from payday loan companies in the first place.

Using a payday loan is often cheaper than borrowing on an unauthorised overdraft (or even the interest of a credit card in some cases) providing the loan is paid off on the day agreed. Interest and charges are added to the initial debt when the date is not adhered to, and there is a threat that the debtor will become a ‘zombie debtor’, where all they pay each month is the interest that accrues, rather than ever dealing with the capital itself. Trust deeds may represent a viable option where it is simply impossible to deal with debt repayment effectively.

A common trend for individuals who borrow from payday loan companies is to borrow again from another payday loan firm to clear previous debts. This results in the first debt being cleared on time and in full. They now have a replacement payday loan, which in turn will be paid off using another firm, thus the cycle of debt continues. Eventually, payments on the loans will be missed and, as they stack up, there is a need to cut the cycle and attack the debt issue head on. With interest being charged at as much as 4000%, sequestration and trust deeds commonly become the final destination where this kind of debt spiral is in effect.

So will a payday loan affect your credit rating? Probably not, though it might affect your ability to access some mainstream lenders. Perhaps a more important question should be: are payday loans likely to make the situation worse in the end? Seeking professional trust deeds advice or debt advice forms the first step in breaking the cycle.

If you’re struggling with personal debts then you should seek professional debt and trust deeds advice at the earliest opportunity. Any delay is only likely to make your situation worse. Call our trust deeds advice line on 0800 043 7201 today if you would like to speak to an adviser.

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