Last updated on September 15th, 2019 at 10:16 am
How Can You Afford to Make the Payments on Your Bad Credit Loan
Growing up, your parents may have hinted at how borrowing money is bad and how you can end up in debt. However, circumstances push many people to borrow and there’s no perfect way to borrow because every loan decision you take comes with its own set of risks – even for the best loan product in the market.
For subprime borrowers, the risks and terms are amplified. In fact, the only remaining option is to take out a bad credit loan and this is where their woes triple, the worst being trapped in an endless cycle of debt.
While many factors go into a loan decision, one factor overrides all. When taking out a bad credit loan, you must ensure that the loan payments are affordable. If they are, everything else will be fine.
Bad Credit Loans
A bad credit loan is a type of loan extended to borrowers with poor or bad credit. Poor credit or subprime borrowers are those consumers with credit scores that fall under 630. According to traditional lenders such as banks, these are risky borrowers and will not qualify for a loan from these lenders.
However, there’s a catch for getting approved for a loan with bad credit. High-interest rates. Lenders consider this type of borrowers to be at a higher risk of default than those with higher scores. Therefore, if you want better terms, you must improve your overall score.
With the high-interest rates, quick loans bad credit lenders can cover the risk associated with lending to subprime borrowers. Nevertheless, it still doesn’t justify the sky-high interest rates many lenders charge. In fact, some of them require you to pay back the entire loan amount at once, which makes loan repayment even steeper.
Types of Bad Credit loans
Installment loans, payday loans, title loans, and pawnshop loans are the four main types of bad credit loans. The last three don’t require any form of credit check during qualification. Also, some installment loans will not check the consumer’s credit when lending but most of them perform soft checks that don’t hurt your overall credit score.
● Title loans: This is a short-term loan, typically one-month repayment with APRs averaging at 300%. These loans are secured by a car title, which is different from payday loans. The only advantage of this loan type is the amount is a bit higher than with payday loans. However, if you fail to repay the entire loan amount plus interest, the lender will repossess the car and sell it to recover their money.
● Pawnshop loans: This is another secured loan that uses the borrower’s valuables such as electronics and jewelry as collateral. While the loan repayment period for pawn shops varies from one state to another, the average period is about a month.
The APRs will have you thinking twice about putting up your valuables as collateral. These start at 15% and can go all the way up to 240%. Similar to title loans, if you fail to repay the loan, the lender will sell your item to recover their money.
● Payday loans: Of all the bad credit loans available, payday loans rank as the worst of the pack. These loans have the shortest repayment period – two weeks only. Lenders will want access to your salary account, which means as soon as you get paid, the lender will automatically deduct their money. That’s the reason for the name “payday loans.” The rates may seem fair at first glance, but annualizing them result in 300% APR or even higher.
● Installment loans: These loans work in the same manner as personal loans. However, instead of making a lump sum payment like in pawn shop, title, and payday loans, you’ll pay off the loan in multiple regular installments. The rates, however, are lower compared to payday loans but this will depend on the lender.
Consider this scenario. What are the chances you’ll have $500 in two weeks after taking out a $400 payday loan? Of course, they are next to zero. Even if you expect a paycheck to cover the loan, coming up with such a huge amount of money is difficult.
Let’s say you come up with the money, this will likely cause a massive dent in your overall budget. In fact, the gap will be so big that you’ll need to borrow more money to cover your household expenses.
According to The Pew Charitable Trusts, a mere 14% of payday loan borrowers can afford to take out these loans. Keep in mind, millions of Americans take out payday loans but the main reason why many borrowers fail to repay these loans is due to the lump sum repayment required for these loans. It’s simply next to impossible.
Title loans have the same terms but are more consequential for borrowers who fail to repay their loans. Title and payday lenders in several states have permission to roll over customer’s loans, meaning they can impose extra interest to extend the due date.
Installment Loans May be the Best Option
It’s easy for a borrower to fall into a vicious debt cycle because these borrowers only have enough money to cover the interest and not the principal amount. The only way out is to extend the due date every end month, a cycle that traps you in debt as the loan dries out your account.
A bad credit installment loan is better because each payment will pay off a bit of the interest and the principal amount. Also, they can make more than the minimum payments to offset their balance faster. Further, installment loans require a small amount regularly and this is advantageous to the borrower because they can fit them into their budgets.
An installment loan is the best among the pack of bad credit loans, but if a borrower cannot afford the payments, then the entire loan is unaffordable. Therefore, it’s in your best interest to research the type of bad credit loan you intend on taking out. Also, be sure to check the customers’ reviews for your preferred lender.