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Bad Credit Personal Loans: Are They Ever A Good Choice?
For the most part, it is always better to try and achieve your goals in life without having to rack up significant debt. There are instances, however, when loans can help to improve the quality of your life at a reasonable cost. One example of this is student loans, and personal loans are often used to fulfill this purpose as well.
Personal loans are different than credit cards, which are a line of credit. If you are offered a personal loan for $5,000, you will typically be issued a $5,000 check which you deposit into your checking account (or it will be electronically deposited), and you will then pay it off by following your fixed payment plan over a predetermined number of months. Many times banks and other lenders will require that you associate an active checking account with your loan at its inception. In this way they can fund the loan electronically, and the borrower is often times required to sign a disclosure stating that his or her checking account is liable for the loan in the case of default. As you payoff your personal loan, bad credit or otherwise, the amount of your available credit is not replenished as it is with credit cards or revolving lines of credit.
With a credit card you only make monthly payments on the amount of credit you have used, not the total amount you have available. So, in the case of the $5,000 personal loan, you immediately owe $5,000 as soon as the loan is funded. With a credit card you only owe the amount you have used, and your available credit is replenished as you pay it off. If you have a $5,000 credit card with a balance of $1,500 on it and make a $500 payment, then your available credit will be $4,000. The amount of credit used by you and therefore you’re amount of available credit are constantly changing, or revolving. You could have no payments at all each month or you could have substantial payments, it all depends on the amount of your available credit that you actually use.
You will find many companies who offer different types of personal loans for those with bad credit. Often times these “bad credit personal loan” offers are structured with extremely favorable terms for the lender. One of the reasons for this is that lenders who offer these types of loans know that they are lending money to the riskiest group of borrowers that there is. If you have good credit then you don’t need a bad credit loan, and those who are seeking them are an admittedly higher risk to lenders. The cost of assuming this risk is passed on to the consumer in the form of (sometimes) exponentially higher interest rates, short term repayment windows, and excessive collateral requirements or claims in the amount of default. One example of these types of personal loans are what are known as “car title” loans. “Payday loans” are another example of loan types which are traditionally structured with a heavy emphasis on the lender being able to collect significant collateral in the event of a defaulted loan. For example, “car title” loans will often offer to loan a percentage of a vehicles value in exchange for ownership of the vehicle upon default of extremely unfavorable loans. For example, a “vehicle title loan” may offer $5,000 for your vehicle which has a fair market value of $10,000. You will literally give them the title to your (often times paid off) vehicle, and they will hand you a check for between $2,500 and $5,000 financed at an extremely high (SOMETIME TRIPLE DIGIT) interest rate. You will continue to use your vehicle during this time, however you have now entered into an agreement which is extremely unfavorable, expensive and risky for you. Avoid these types of situations at all costs. For more information on car title loans you can visit the FTC.
Improve Your Credit With A Bad Credit Personal Loan
One of the strategies I recommend to my clients who are looking to build or to rebuild their credit profiles is to utilize secured loans and credit cards. Bad credit personal loans are not something I typically recommend. They can help to improve your credit profile, but the cost of the loan (interest rates/repayment terms) is not usually justified when compared to the improvement it offers. There is one kind of personal loan which I do highly recommend for people with bad credit however, and this is a secured loan. Secured loans can help your credit profile in exactly the same way that an unsecured loan does. The only difference is that you deposit cash to qualify for a secured loan or credit card as opposed to qualifying with a high credit score. As far as the credit reporting agencies and your credit score goes, the benefits of both kinds are equal. I recommend secured loans for another reason besides just the improvement to your credit profile though. Secured loans promote financial responsibility and stability and can have a profound impact on your ability to effectively secure and manage credit in the future. When you open a secured loan or credit card, you have to make a cash deposit. The amount of credit extended to you is typically the same as your deposit. If you deposit $500 into a secured credit card, most companies will issue you a credit card with a $500 limit (minus fees if any). The $500 deposit that you make will sometimes earn a small amount of interest, and is essentially simply a savings or money market account deposit which you have no access to for a specified period of time, usually 12 months. This is a great tool to learn the basics of saving money – that is – simply depositing it into an account, knowing that it is there, and not spending it. Secured credit cards and loans are amazing tools for teaching the discipline required to have perfect credit, and can have a tremendously positive impact on credit scores.