Payday loans from non-traditional finance companies may be your last resort for short term loans, but it comes with high interest rates.
By: Hitesh Khan/
You may need a personal loan for a number of reasons — perhaps to deal with unexpected medical expenses, to consolidate high-interest credit card debt, to expand your business, or even to take that well-deserved vacation. Unfortunately, if you have borderline or bad credit, personal loans may be difficult to get at most banks.
If this is the case, you can resort to payday loans from companies that loan money for short periods of time at very high interest rates.
Bad credit personal loans represent an under-served market, mainly because most banks have plenty of available business without dipping into that particular higher-risk pool. Many personal loans through traditional banks are unsecured, meaning that the bank accepts that you are a low risk to default on the loan and is willing to loan you money without collateral.
Unless you are willing to accept a secured loan backed by some form of collateral such as a savings account, fixed deposit, or equity in your home, you generally need a high credit score to qualify for a personal loan. Fortunately, innovative lenders are available to offer personal loans, even if you have bad credit.
They focus on the niche between traditional installment personal loans and short-term payday loans.
These independent lenders generally lend on the principle that the greater the risk that you represent to the lender, the higher the interest rate on the loan. Interest rates on loans with bad credit tend to start at a very high range.
Before approaching lenders for payday loans, it is important to check your credit score before applying for a personal loan to make sure that there are no mistakes in your credit profile and that the offers you receive are in line with your true credit history. It takes time to correct any errors that you find, so make sure that you check your credit report for accuracy well before you apply for a personal loan.
Lenders do take credit scores into account, but they also realize that a credit score is only one part of risk assessment. Careful scrutiny will be given to your income level and the likelihood that your income will remain stable over the life of the loan.
Special circumstances may be taken into account, such as a large one-time medical expense that has caused a temporary disruption in your finances. Do not simply assume that a borderline credit score will doom you to a bad credit loan. If you have extraneous circumstances working in your favor, put them to use in your application and see if you can secure a lower interest rate.
If you do not qualify for a traditional loan and cannot stomach paying high interest rates under any circumstances, consider a secured personal loan. Secured loans offer a lower interest rate option for those with poor credit, since there is no credit check necessary — the lender has an asset that can be claimed or repossessed in case of non-payment. However, secured personal loans are limited to the value of the asset (or less, depending on the lender’s policies). You also have to weigh the lower interest rate against the risk of having an asset repossessed.
Nobody wants to pay a higher interest rate than he or she has to, so consider the purpose of your loan before applying. Is it for debts or upcoming expenses that require immediate attention, or can the loan wait until you have an opportunity to build up your credit score and receive a better rate?
Only you can answer that question, but at least be sure to ask the question before you rush into getting payday loans.
“Bad credit” does not necessarily mean “no credit.” You have alternatives, but be sure to check them out thoroughly. Review the terms to make sure that you understand all the fees and potential charges, and calculate the total amount of money you will pay over the life of the loan. Choose poorly, and you could be caught in a seemingly endless debt cycle. Choose wisely, and you could be on your way to improving your financial position while rebuilding your credit.
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