The Impact Of Credit Scores On Borrowers And Lending Companies

Payday loan companies exist to help employees meet their expenses until they receive their next paycheck

. Many loan applicants run out of cash or encounter emergency expenses that are not covered by their two-week budget. These companies provide them with instant cash and, in return, charge a pre-determined interest rate on top of the actual amount lent.

The lending industry operates on the principle of trust. Lending companies provide cash instantly, trusting that the borrower will return the money in full at a certain due date. To make this possible, they require a certain interest rate that can double or triple according to the number of months the amount is not paid. In this way, the borrower will be forced to pay the full amount of the loan, plus the primary interest, to avoid incurring a large debt.

On the other hand, a payday loan is somehow different from other types of loan. In the payday lending system, payment is more secured because the borrowers next salary is bargained. This means that as long as the borrower enjoys stable employment, the lending company is ensured of loan payment. In case of failure to pay, extensions can be implemented according to the agreements provisions.

However, for the security of the payday loan company, the company may resort to inspecting the credit records of the borrower, in order to ensure the investment. They usually determine the creditworthiness of a borrower from his or her credit scores. Determined by reputable credit scoring companies, the credit score is a number that can indicate if a person will be able to pay his or her debt.

A borrowers chance of getting an instant cash advance from a payday loan company is mostly dependent on his or her current credit scores. The entire credit history of the borrower is summarized by his credit score. However, since credit scoring is reputation-sensitive for borrowers, lending companies obtain information from top credit scoring companies.

The downside of credit scoring is its inconsistency. In the US, there are many analytical services that provide credit scores for citizens who have been involved in debt. If results among these services are different, then a payday loan company usually gets the average credit score.

by: Sofia Britts

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