Bad credit means a low credit score or a limited credit history. Issues such as missed fees or maxed out credit cards can negatively affect your credit score.
Bad credit loans are an alternative for people whose reputation represents any financial errors, or people who have had little time to develop a credit history. These credits are either secured or unsecured.
Numerous banks, credit unions, and online lenders provide loans to those with poor credit. Still, the criterion for what is deemed a "creditworthy borrower" differs according to the institution. Read on to learn about the benefits and drawbacks of having a bad credit loan for debt repayment.
Pros of Bad Credit Loans
Despite the apparent negative perception of bad credit loans, there are some very good things to remember.
Fast Cash
Perhaps, you may apply for a bad credit loan and get the cash deposited directly into your bank account within as short as one working day upon confirmation.
Extended Repayment Period
If you need a small amount of quick cash, payday loans are an alternative, but usually, the lender demands their money plus interest by your next payday and the APR is insane.
The APR can be as high as 400% on a two-week payday loan, the Consumer Financial Protection Bureau reports.
By comparison, bad credit loans are installment loans that typically range from one to five years, meaning you'll have the chance to repay the loan over an extended time.
Rebuild Credit
Many creditors would report bad credit loans to the credit bureaus regarding account activity. If you make payments on time, your credit score could get a small boost as it accounts for 35% of your FICO score in payment history.
Most significantly, paying on time would prove potential creditors to handle your existing debt commitments responsibly.
Cons of Bad Credit Loans
There's also a negative aspect of bad credit loans because if you get hit with another financial meltdown, the long-term consequences might make things worse.
More Fees
Just like in traditional personal loans, bad credit lending is followed by several charges, such as the following: origination fees, which are charged to process the application for a loan and to open the loan if accepted.
You will be issued a late payment fee if you are one minute past the cut-off time on the due date. Some lenders can charge a fee if you remit payment using a personal check instead of an automatic withdrawal or Electronic Funds Transfer.
If the payment does not clear the bank and is returned to the lender, there will be a fee for it as well. Also, anticipate your bank to charge a Returned Item Fee that may be $36.
Automatic Withdrawals
You get sick to your stomach after accessing your banking information online and finding that money has disappeared from your account.
That occurs when you borrow from a bad credit lender who demands automatic withdrawals monthly. You'll know the deduction is coming, and you may even be free to pick the date of the withdrawal.
Collateral Requirement
Some lenders will welcome you and your tattered score with arms wide open, but there may be a catch. You have to consent to use an asset as collateral if they give you a secured bad credit loan.
And, if you're going to default on the loan, wave farewell to your new sports car, motorcycle, or Rolex watch. For lower loan amounts, these things might be a little extravagant, but you get the idea.
Bottom Line
Getting a poor or fair credit score may affect your ability to get loan approval and may even affect your ability to rent an apartment or buy a house. If you get accepted for a bad credit loan, you'll typically get the highest interest rates and higher fees.
That being said, there are long-term practices you may acquire to boost your credit score, such as paying out your bills in full each month and checking your credit report regularly to detect errors.
