Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Mar 4, 2013

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A lender does not check a potential borrower’s credit score before approving a new payday loan.

Payday loans are small, short-term loans that are due on the borrower’s next payday. The loans are usually repaid via a pre-written check or an automatic bank draft.

Payday loans are not structured like secured loans in which an automobile, home, or valuable item can be claimed to repay the debts. Instead, these short-term loans are secured only by a borrower’s bank account number or postdated check.

Leslie Tayne, financial attorney and debt specialist, said that without knowing a borrower’s credit score, lenders are taking a risk. She said high interest rates are present to “ensure the money borrowed is repaid in a timely fashion.”

According to a Center for Responsible Lending report, around 44 percent of borrowers defaulted on the loans. Since the default rate is so high, increasing the interest rate and increasing the potential for profit helps to mediate the risk factor of the loan itself.

Despite large interest rates, payday loans are a viable option for some borrowers.

“Because payday loans do not require lenders to check on a credit score, payday loans can work to the advantage of borrowers with poor credit and are unlikely to qualify for a loan,” Tayne said.

Although the short-term loans can be beneficial for those with little to no credit, they offer unfavorable terms for borrowers with high credit scores. Tayne said the failure to check a credit score on payday loans can be a disadvantage for borrowers.

“It does not present them with the opportunity for taking advantage of lower interest rates that might be available in exchange for a good credit score,” she said.

Tayne said borrowers with good credit should consider personal loans instead of payday loans since the first option requires a credit check.

“[It can] mean all the difference when it comes to taking advantage of any lower interest rates that might be available as a result of good credit behavior,” she said.