Bad Credit Loans: Online Guide on How to Handle Them Right
Is a Bad Credit Loan Different From a Payday Loan?Payday loans are typically low-dollar, short-term, and high-interest loans. They are usually tied to a specific paycheck and payday schedule and can come due as soon as two weeks. High interest and fees can make it hard to repay the loan in full by next payday, and a cycle of debt is created. Bad credit loans are typically of larger amounts and have better terms and more reasonable, longer-term payment schedules.
How do I Find a Reputable Lender?There are several crucial and easily quantifiable differences between lenders’ profiles in the bad credit loan arena; or said another way, there are â€œGood, Bad and Uglyâ€ bad credit lenders.
|The â€œGoodâ€ Lender||The â€œBad or Uglyâ€ Lender|
What are the Risks of Bad Credit Loans?Taking out a bad credit loan is not necessarily a bad thing â€” itâ€™s all in how you manage it. That said, the real culprit is found in the â€œgutsâ€ of the loan: the terms of the loan, and specifically, the repayment schedule. Bad credit loans are high-interest rate loans. You need to understand how getting one of these loans might play out for your particular money â€œstyle.â€
Assessing the SituationTo assess the risk, the trick is to understand why your credit score is low. The best way to do this is to have a look at what makes up a credit score. Our graph below will help you understand how this works. Now ask yourself the following questions:
- Do you have a history of being late on payments or forgetting to pay? Borrowers with poor to bad credit often have problems making on-time payments.
- Is your income seasonal or is it hard to predict because it fluctuates a lot? An unpredictable or unstable income is a common cause behind bad credit scores.
- Or maybe you do not have much of a credit history yet, or thereâ€™s that one late payment that is haunting you (and your credit).
The Real Impact of Missed PaymentsAccording to Experian, a missed payment has the most significant and longest lasting impact on your credit score. The more recently the missed payment occurred, the higher the effect. And, of course, the more missed payments you have, the longer it will take to recover from them. As a matter of fact, a survey conducted by Citi shows that “59 percent of Americans have paid a bill late in their lifetime, and 88 percent of those have done so in the past 12 months.â€ That is huge, irrespective of the reasons that stay behind these facts. If you have missed payments in the past, especially the recent history, you are at risk for making the same mistake with a bad credit loan. And the consequences are genuine. CAUTION! If you canâ€™t repay your loan in full for any reason, and you miss a payment or need to renew your loan, you could find yourself in a spiral of debt that you cannot repay.
Impact on the Cost of the LoanBelieve it or not, your credit score will be one of the most important factors in determining the APR on a loan. Generally speaking, the higher your credit score – the lower the rate will be. This can be seen in the table below, on the example of the APR for Personal Loans.
|Credit Score||Average Personal Loan APRs|
|Excellent (720 – 850)||10.3% – 12.5%|
|Good (680 – 719)||13.5% – 15.5%|
|Average (640 – 679)||17.8% – 19.9%|
|Poor (300 – 639)||28.5% – 32.00%|
What Are The Benefits of Bad Credit Loans?Of course, if you have bad to poor credit, a bad credit loan gives you access to the funds you needâ€”and quickly. A bad credit loan in many situations is better than no loan at all. Some of the benefits of bad credit loans include:
- Quick approval time
- Easy approval process (bad credit loans have approximately 80-90% approval rate)
- The opportunity to improve a borrowerâ€™s credit history if you make payments on time
Bad Credit Loans Trends?Post-recession (2008), bad credit loan interest rates have been improving. As you can notice in the Table below, a slight dip occured around 2008/2010 recession. This situation could have been caused by the large number of people declaring bankruptcy or defaulting on their loans.
|Year||US Average Credit Score|
Is a Secured Bad Credit Loan Better Than an Unsecured One?That depends. Secured bad credit loans usually offer lower interest rates than unsecured loans. They also provide better terms and may grant you access to more substantial fund amounts than unsecured ones. However, secured loans are precisely thatâ€”more â€œsecureâ€ for the lender, not necessarily for you, the borrower! When you get a secured loan, your collateral is very much at risk if you do not pay on time or miss a payment. TIP: If you donâ€™t want to put any real property at risk, but want the lowest interest rate possible, look for loans that allow for security deposits instead of collateral.
How Much Money Will I Receive?A good rule of thumb for bad credit loan funding is somewhere in the range of $500 to $5,000. Of course, lenders and loans vary widely, and you will need to research to find the right loan for the right amount for you. Here is a simplified guide to the kind of loans you’re likely to qualify for based on credit score and income.
|Credit Score||Max DTI Ratio||Monthly Payment||Max Term||Notes|
|720 +||N/A||30% of gross monthly income||60+ months||Lenders will allow any reasonable payment based on disposable income|
|640 – 720||Less than 50%||20% of gross monthly income||60+ months|
|590 – 639||Less than 45%||17% of gross monthly income||48 months|
|530 – 589||Less than 40%||15% of gross monthly income||36 months||Many lenders will limit loans to a maximum of $6,000|
|< 530||Less than 35%||15% of gross monthly income||24 months||Many lenders will limit loans to a maximum of $5,000|
How Long Will it Take to Get my Funds?Many bad credit lenders need approximately 24-48 hours to do their underwriting and to get the approval notice to you. Always check the details for each loan if you need funds in a hurry or have a serious emergency on your hands.
Will a Bad Credit Loan Improve my Credit?Yes, but only if you make on-time payments. Remember, a missed payment has the most negative and long-lasting impact on your credit score. And recently missed payments hurt the most. Always use good financial sense when considering any loan. Consider all the factors, including the APR, the terms and the repayment schedule, if the collateral is required, and any other informationâ€”before you sign.
Alice was born and raised in Compton, California. Then she studied at Yuin University, the place where she became passionate about researching the thin ropes between money and meaning. She is insatiably interested in peopleâ€™s potential, wondering why some succeed and others donâ€™t. Thus, the articles on her blog explore a multitude of seemingly unconnected things: money, psychology, entrepreneurship, creativity, spirituality, philanthropy, just to name a few.