Hey there! Let’s talk about something kind of serious today – Loans for Bad Credit. Maybe you’ve considered getting one of these to cover an expense, finally get that plasma TV you wanted? But have you really thought about how it could affect your money matters long-term?
These particular loans designed for people with poor credit scores are known as loans for bad credit. Before committing, you should be aware of the risks and some very significant drawbacks associated with them. I’ll use really simple terminology to break it all down for you in this post.
We’ll have a closer look at the higher costs associated with bad credit loans, the ways in which they may negatively impact your finances, and some options to consider. My intention is to provide you with all the information you require to make the best decision for your financial future. Now let’s begin!
What Makes Loans for Bad Credit So Pricey?
First off, let’s talk about why bad credit loans end up costing you way more than others. It all comes down to risk.
Based only on your credit history, lenders have to make a wild guess as to whether you will actually repay the loan. A poor credit score raises red flags with lenders, indicating that you have a history of missing payments or defaulting on debt.
Bad credit lenders demand much higher interest rates and fees on their loans in order to mitigate the risk that you might not be able to repay them. For someone with good credit, double-digit interest rates would be highway robbery.
On top of the rate, you’ll often get hit with expensive upfront fees and other hidden costs just to take out the loan. It’s how these lenders make their profits and try to get ahead of possible non-payments.
How They Can Backtrack Your Goals
Now let’s discuss how regularly relying on bad credit loans could completely throw your bigger money goals and plans off track:
Risk of Debt Cycles – Bad credit loans are easy to fall into a cycle with. You take one out to cover an expense, then need another to pay that one off, then another, and so on. The excess interest guarantees you stay stuck in revolving debt.
Impacts Other Borrowing – Having tons of bad credit debt makes you look even riskier to future mainstream lenders. Say goodbye to good rates on mortgages, auto loans, etc. down the line, and you will never be able to get a phone contract without a credit check.
Messes with Budgeting – Bad credit loans have crazy high payments that’ll wreak havoc on your monthly budgets and make it harder to spend mindfully.
Impacts Housing, Jobs, Etc. – That crummy credit score attached to the bad credit will continue to haunt housing, employment opportunities and more.
Delays Wealth-Building – With so much money ploughed into expensive debt, it’ll take way longer to build up any personal savings, investments or retirement fund.
What Are Some Better Alternatives?
What to do when these loans seem like a horrible idea? Here are some alternatives to look into:
Credit Union Loans – These non-profit lenders are more flexible and may offer better rates than banks if you have poor credit. Definitely worth checking into local credit unions.
Peer Loans – With peer lending through companies like Zopa, you get loans funded directly by individual investors instead of big lenders. The rates can be much lower.
Non-Profit Lending Circles – Look into lending circles organized by non-profits and community groups. These affordable loans are meant to help, not gouge you.
Payment Plans – For expenses like medical bills, repairs or large purchases, see if you can opt for an interest-free payment plan instead of a loan.
Get A Co-Signer – Having someone with great credit co-sign a regular loan can help you get approved and score much lower rates.
In the UK, guarantor loans are another option where a trusted friend or family member agrees to pay if you default on the loan.
You can also explore ways to get approved for very small mainstream bank loans first to start improving your credit. Or look into incentives and non-profit resources to help rebuild your credit before taking on any hefty loans.
At the end of the day, bad credit loans should really be one of your last options. Unless you are sure you can deal with the extra costs timely, its better to look for an alternative.
Take it Slow and Fix Your Credit
First Look, having bad credit in the first place totally sucks. I get how tempting it is to just bite the bullet for a bad credit loan in order to handle an expense or emergency quickly.
Instead, I really advise taking a big step back before taking out a bad credit loan. Exhaust all your other lower-cost borrowing possibilities first. And if nothing else works, seriously consider buckling down to work on rebuilding your credit before trying to take on any loans.
It will help you out in the long run to have slowly fixed your credit. This way, taking out
In Conclusion
It’ll take patience and discipline for sure, but getting your finances and credit in better shape has to be the priority. From there, you’ll eventually qualify for affordable lending and be able to make smart money moves for yourself.
However, there are levels to how bad these loans for bad credit get, with there being some really good lenders in the market. Do your research to make sure you’re getting the best deal out of them. Look for lenders that provide a long term payback plan, with the least interest rate. This way, you don’t bankrupt your future self by taking out a loan!
Get resourceful, make a plan to improve your credit over time, and only take out any loans after tons of research into the best possible terms. Your future money self will thank you for avoiding those predatory loan traps.
