A lot of people immediately discard bad credit loans as a possible solution to their debt problems. The interest rates attached to these debt products can frighten even the most desperate borrowers. Nonetheless, if used responsibly, this type of credit loan can be the leverage you need to rebalance your personal finances. Here is all the information you need to know about bad credit loans and how they can save you money:
What is It?
As the name suggests, bad credit loans are a form of personal loan that is specifically designed for borrowers with low to no credit. A bad credit loan is offered by different financial institutions, ranging from conventional banks and credit unions to more nascent alternatives like peer-to-peer lending.
One of the defining attributes of a bad credit loan is that they are understandably steeper to repay compared to your conventional loan. This is due to the fact that lenders want to be compensated for the higher risk involved in lending their cash to someone with an unproven financial track record.
So what counts for a low credit score? Essentially, a FICO score that falls below 630 is considered low. From 300 to 549, you are said to have poor to bad credit while 550 to 629 is considered to be a subprime loan range. High credit scores are those between 720 to 850.
A bad credit loan can be subdivided into two types – unsecured and secured. An unsecured bad credit loan involves borrowers agreeing to repay the amount according to the terms laid out on the contract. If they are unable to follow through with the agreed upon repayment plan, the lender can and will exercise their rights to pursue collection of the debt owed either via a collection agency or other legal option. Examples of unsecured bad credit loan include credit cards and student loans. A secured loan, on the other hand, requires some form of collateral against the borrowed cash. This means that, in the event the borrower fails to repay, the asset used as collateral will be ceased, such as a car, house, or priceless art.
Benefits of a Bad Credit Loan
Bad credit isn’t necessarily a hindrance towards financial stability. A bad credit loan can save you money by allowing you to pay outstanding loans that are charging you higher interest rates. For instance, if you are currently paying for 20 percent on your current loans, you could apply for a bad credit loan that charges 15 percent, therefore saving you 5 percent.
Since the pre-approval process for a bad credit loan is more lenient compared to traditional loans, it’s a good way to buy/replace assets, such as business equipment, private transportation, medical bills, etc. If investment opportunities emerge, you can also use the funds from a bad credit loan to profit from these time-sensitive market trends.
Most bad credit loan providers operate via the web, giving borrowers the convenience of not having to go to the physical offices of a bank or credit union just to apply for a loan. Fund transfers for a bad credit loan are usually completed within 24 hours. There is no need for phone calls, emails, or any lengthy waiting periods only to see your application rejected. This not only saves you money, but also saves you time and energy.
Final Thoughts
While a bad credit loan is not as bad as it sounds from the borrower’s perspective, be sure to use the tool responsibly. To escape the vicious cycle of debt, make changes towards your financial habits, creating and improving a budgeting plan, limiting credit card usage, and making frugal choices day by day.