Bad Credit Loans: Everything You Need to Know

Nobody wants to be in a bad credit situation. If you are in this situation or have been in this situation, you are not alone; it happens to the best of us. A poor credit status can be a result of poor financial management or just hardships in life. Loss of a job or an illness is among the issues that can land you in a bad credit situation.

Are there still loan options for you if you have a bad credit history? Yes, there are plenty of options for you. These loans will not be under the best of terms.

If you have a bad credit badge getting a loan may seem an act in vain. Thankfully, this is not the case. The bad news is that these loans are financially risky and may leave you in a worse situation than you were.

Read on to get a good understanding of what a bad credit loan is and how you can get one.

What are the bad-credit loans?

These are loans that are specifically designed for those with a low credit score or have no credit history. Unlike conventional loans, they carry a high-interest rate and greater restrictions. The punitive terms and higher interest rates are meant to cater to the high risk of default.

Bad credit loans are also commonly referred to as personal loans. They are usually for a fixed short term. In most cases, those who take them out rarely focus on the interest rate charged.

The fees charged and the terms of these loans vary from lender to lender. They can either be secured, i.e., backed by collateral or unsecured.

What is considered a bad credit score?

The FICO credit scoring system is the most used credit- scoring model. Under this model, the scores range from 300 to 850, with 850 being the highest possible score. A good credit score starts from 670 and goes up to 739. A score above 800 is considered exceptional.

A bad credit score increases the chances of your loan application being rejected by a lending institution. All is not lost when you get a bad credit score. There are long-term habits that, if you adopt, will improve your credit score. Paying your bills on time is the most recommended way of improving your credit score.

Factors to consider before taking out a bad credit loan

Bad credit loans always sound like a godsend opportunity until you read the fine details of the contract. To help you make a better and informed decision, we recommend that you first consider the following:

• How much you need to borrow
• How much you can afford to pay back each month
• Who are the available bad credit loan providers, and what are their terms?
• How long you want to take out the loan for

Types of bad credit loans

There are several types of bad credit loans:

Personal loans

Personal loans can either be secured or unsecured. Secured personal loans are backed with collateral, while unsecured loans lack collateral. If you have a bad credit history, you are more likely to get a secured loan than an unsecured loan.

Payday loans

Payday loans are short-term loans whose payment is usually due the next month. The amount of money involved is also relatively low. The total cost of borrowing involved is usually high.

Peer-to-peer loans

This involves borrowing money from your acquaintances. They could be family members, friends, or colleagues. The rates also offered usually lower than those charged by banks and other lending institutions.

Student loans for bad loans

Student loans are tailored to meet your educational needs like tuition, accommodation, and reading materials. Many personal loan providers will not allow you to use the loan for educational purposes. If you have a bad credit history, you will need a sponsor to co-sign your application before you qualify.

Read more: Best Credit Cards for Students

Pros and cons of bad credit loans

The following are the advantages and disadvantages of taking out a bad credit loan.

Pros

• Fast approval: Institutions offering these types of loans understand that they mostly offer emergency loans. To serve their clients better, they have made the process of applying for these loans simplified. All they do is to make sure that the borrower understands the repayment terms.
• They have a high approval rate: It is highly unlikely that your application for a bad credit loan will be denied. The lending institutions already understand that they deal with risky clients. They will not hesitate to approve your loan application but will compensate for these punitive credit terms.
• They offer a chance to improve your credit history: Extraordinary situations call for extraordinary measures. If you are stuck in a financial hole, bad credit loans can offer you a way out. With these loans, you can actually improve your credit history. They not only have a high approval rate but also carry no hidden or extra charges.
• No extra or hidden fees: Lending institutions usually include many hidden costs when processing a loan request. These extra charges include processing fees, ledger fees, and insurance charges. This is not the case with institutions that offer bad credit loans.

Cons

• They carry a high-interest rate: Compared to conventional lending institutions, bad credit lenders charge high-interest rates. This is because, with this type of loan, the risk of default is high. With these choking interest rates, clients may find it difficult to pay down these debts.
• Fixed repayment terms: A unique feature of bad credit loans is that the amount you repay every month is fixed. The amount is usually set at the beginning of the contract. So, before you sign the contract, make sure you are comfortable with the set amount.
• You can get stuck in a never-ending debt cycle: Taking out a bad credit loan is like digging a hole to fill a hole. These loans may keep you in a vicious cycle of debt that is hard to get out of. They say that the devil is in the detail. To be safe, always read the fine print of the contract before signing up.