How Your Credit Rating Affects The Cost Of Borrowing


There are times in all of our lives that we will need to borrow money, whether that is in the form of a personal loan, a credit card or perhaps a payday loan, but whatever way we borrow, there is one thing that will affect this. Your credit rating. This simple number can play a massive part in a variety of factors when borrowing such as your eligibility, how much you can borrow and, most interesting, how much it will cost to borrow money. The cost, also known as interest is sure to change depending on how good or bad your credit rating is. In this article, we are going to look into how your credit rating will affect any loans you decide to take out.

How Your Credit Rating Affects The Cost Of Borrowing

If your credit rating is good, the interest that you will pay on any loans or credit cards will greatly decrease compared to if you have a very bad credit score, which would inevitably cause the interest on a loan to skyrocket. There are reasons behind this, and we are going to go into a little more detail on why this is. However, one of the most advisable things is to attempt improving your credit rating before applying for loans or credit cards and this will ensure that you get the best possible price on the interest. 

When you see an advertisement for a credit card, you will likely see that the APR is said to be between two figures, and which figure you are given will depend on your circumstances and your credit rating. You will usually find that the interest rate you are offered will fall somewhere in between these two figures. If you are thinking of taking out a loan of some form, the same sort of rules will apply to mean that the better your credit rating, the better the interest rate you will get. Loans are usually advertised with an average interest rate displayed and the APR that you are offered will vary depending on how much of a risk you are. Lenders are often known to review their customers at certain points during borrowing, and if your credit score has changed, they may either increase the rate of interest or lower it depending on the changes that occurred. That being said, if your credit card company increases your interest rate, you are legally within your rights to ask for the account to be closed and a repayment plan set up. This will reflect on your credit score but is an easier way to manage your repayments. The main reason that payday lenders ask for more interest from those with a bad credit rating is that it is riskier to lend to people who fall within this category. 


By maintaining a good credit rating, you are much more likely to be offered a good APR on any loans or credit cards that you take out. It is also important to keep your credit rating healthy so that if any reviews take place, your interest rates won’t be negatively affected. If you have a bad credit score, this will affect how much it costs to borrow but by improving your score, you can change these higher rates of interest.

How To Get Out Of Payday Loans

Although payday loans come in handy every time you need fast cash, they can be very tricky and hard to get out of. Payday loans are well-known for having high-interest rates (annual percentage estimates to 400%), short repayment period ( usually 14 days), and the ability to be renewed or rolled over. These specific characteristics can easily lead the borrower into an expensive cycle of loan expansion. The payday loan trap is the term referred to, when someone falls into a series of increasing payments that don’t seem to end, after borrowing a payday loan. 

Fortunately, there is always solving for any problem and luckily for us, there is not just one but multiple solutions for the payday loan trap.

With that being said, next, we will cover the most efficient ways to escape the payday loan debt.

How to get out of payday loan debt

First things first, it’s imperative to say that if you got enough cash in hand, even if it has been just a couple of days from the borrowing, it’s better to pay off the loan and get the weight out of your chest instead of constantly delaying. Many lenders allow canceling the transaction within one business day at no cost. 

If you don’t get to be in that position and neither of the following methods can help you, then it’s better to start from now to either increase your cash income or/and cut expenses and save.

Now, let’s see what other effective strategies can help you escape the trap.

Prolonged payment plan (EPP)

An EPP is an operation imposed by law in many countries including the UK, that favors the borrowers who struggle with the repaying. It supports you to delay the payment date even up to four more weeks. As lenders are obliged by law, you can freely ask them for an extended payment plan or any other short-term alleviation. However, this bounding is not applied to all companies, meaning that there might be lenders that can’t and don’t have to offer you any tender of this kind.

Debt consolidation

What does debt consolidation mean? Debt consolidation loans are other types of loans meant to have lower interest rates, longer repayment periods, softer fees, and better repayment terms overall. In that way, it is much easier to take another loan and repay the payday loan entirely. There are several good options, but personal debt consolidation loans are the best pick for this matter. Despite the only minor downfall ( credit check required), personal loans allow you not only to get rid of the existing loan but to pay off any other high-interest debt (such as credit card balances) as well.

Personal loans are much more predictable and easy to manage, therefore you can easily get one that fits your budget to repay everything and then, slowly and effortlessly pay it, without having to worry about not being able to pay it on time.

Alternative loans/lenders

Instead of rolling over and renewing the actual payday loan, it’s handier to get a payday alternative loan (PAL) that does both, meet the requirements that payday loans have and provides better repayment costs and terms. Unlike personal loans, these short-term PALs don’t require credit checks, in fact, they focus more on people with bad credit, therefore it is more likely for them to be the first ones approved. Although these loans were first designed to be a better version of payday loans, people usually take it to pay the existing loan. You can borrow as much as £1,000 and pay it back in a ‘long’ period of six months. The annual interest rates can get up to 28% at most. The only requirement is to open an account at the credit union, to pay an application fee of £20, and keep it active for 30 days.

Now that you know the best ways to get out of payday loan debt, it’s up to you to take action and escape this trap.