We see and hear all over, "Bad Credit Loans", "Credit Repair Loans", "Bad Credit, No Problem Loans", and the list goes on and on. If you know you have bad credit, or if you think you have bad credit, and you need a loan, it's important that you know and understand the types of bad credit loans to avoid.
Auto Title Loans
Auto title loans are advertised online, on the radio, and there are even store fronts. A quick google search found quite a few in Rochester, in the Twin Cities, and in Wisconsin. When you take out this type of loan, you are using your vehicle as collateral. You are basically saying, "Yes, give me a loan, and if I don't pay you back as agreed, you can have my car."
Here's where this becomes a major disaster waiting to happen. Usually, a person needs a few thousand dollars and the interest rates can range from the double digits to the triple digits. Paying that much interest can quickly snowball and become unmanageable. When that happens, the lender takes your vehicle and you may never be able to get it back. To make matters worse, if you are still making car payments to your financial institution on the vehicle, your still on the hook for those too, even if you don't have the car.
Avoid auto title loans at all costs. There are many other options for getting a financial boost that don't require you to put your assets on the line. Many of which can actually improve your financial situation in the long term.
Auto Loans from "Bad Credit" Dealers
There are auto dealerships that advertise exclusively to people with bad credit, promising fast approvals and sometimes even guaranteed approvals, regardless of credit score or history. If this seems to good to be true, its because it probably is, and here's why.
First, the interest rates on loans from "bad credit" dealers are most certainly in the double digits. Second, the terms of these loans usually exceed five years. The typical term for a vehicle loan is only four to five years. The reason the terms are usually five years or less is because of depreciation. Depreciation means the value of your car decreases over time. You don't want your car to depreciate faster than you can pay it off.
Even if you get one of these loans, you pay it on time every month and improve your credit, when you go to refinance the loan for a lower rate, you may find that you are "upside down." This means that you owe more than what the car is actually worth, and most lenders won't refinance the loan because of that, leaving you with a high payment and a car that isn't worth much. That's a bad situation to be in, you should avoid using auto loans from "bad credit" dealers. Always check with a trusted financial institution first. If you get turned down by a traditional bank, talk to a credit union instead. They are more likely to work with you when you have bad credit.
Pay Day Loans
Pay Day loans are illegal in some states, and the rules can be different from state to state. Pay day lender have store fronts and there are even quite a few online. Here's how these loans work: If you can show proof of your income, usually your pay statement or direct deposit amount, you can get a small loan, usually between $100 and $1,000 dollars, with interest.
Let's say you take out a $500 dollar loan from a pay day lender. Two weeks later when the loan is due, this is assuming you get paid every two weeks, you will probably owe $570. The extra $70 is fees and interest on the loan.
This may not seem like a big deal, but what if your paycheck is $1,000, and you need to pay bills, like rent and utilities. So you pay the lender $570, now you only have $430 to last for the next two weeks. Because you had to payback $570, it's likely that you will take out another $500 loan to get you through to the next payday. When you do this, the cycle begins, and it can be very difficult to break the cycle or even to catch up.These loans also have a snowball effect, and people can find themselves trapped.
At the end of the day, these loans are not short-term fixes to a temporary problem. Payday loans are can be extremely devastating to you when you are already in a tough financial spot. It is best to avoid payday loans and look for more reputable options for getting caught up on bills.
Quick loans are those lenders that will lend you money after a fast or quick credit check. Seems easy right? It's easy to get approved, but the terms of the loan can be really bad. Often these loans also have double digit interest rates, and there are fees associated with obtaining the loan. When all is said and done a $2,000 loan could end up costing a person $5,000 or more over the life of the loan due to fees and interest charges.
This is why it is so important to pay attention to the fine print. Always do your research before taking on new debt. Quick isn't always in your best interest long term. It is best to avoid quick loan offers when you're in a tight spot.
What Do I Do If I Have Bad Credit and Need a Loan?
Even if you do have bad credit, it is possible to get a loan. It's also possible to get a good loan, that is, one without and exorbitant interest rate or crazy fees. It is important to talk to a trusted financial institution when making financial decisions and avoid loans aimed specifically at those with bad credit.
Here's How You Do It:
Do your research. Look for a local credit union or community bank in your town. Make an appointment to sit down with a loan officer. I recommend this because the loan officer can sit with you, review your credit report and you can have a real and honest conversation.
At that appointment, be very open and honest about your credit history. Tell your story. Explain to them exactly what happened, and explain why you need credit. There should be no judgement, just guidance.
I will be honest, it may not be possible for the lender to approve you for credit at that appointment. But, they should be able to help you develop a solid plan to get you on track to be approved for credit at a later time.
My best advice:
Be Honest. Communicate with your Lender. If you have a plan, stick to it. If you don't have a plan, make one.