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Pros and Cons of Bad Credit Loans

Allison Martin
Written by Allison Martin

The moment the clock strikes five, you dart out the door, jump in your car and hit the highway for the long commute home. It’s Friday and you couldn’t be more excited about a night out on the town with friends. And although money’s tight, you’ve managed to scrape up a few bucks to enjoy yourself.

As you’re exiting the highway, your car begins to jolt and you hear a loud “pop”. There goes your tire, plans for the night and the little money you do have in your savings account.To add insult to injury, you learn that all four tires need to be replaced, along with one of your drive belts, or the car will soon be inoperable. Bummer.

But there’s an even bigger problem. You’re still $2,500 short and don’t qualify for in-store financing because you have blemished credit. So, you call the bank to ask for help and they tell you that your only option is a bad credit loan.

Should you take the cash or throw in the towel and catch public transportation?

If you’re in a similar situation, a bad credit loan may seem like a viable option. But before you sign your life away, here are some important factors to consider:

Pros of Bad Credit Loans

Despite the negative stigma that is associated with bad credit loans, there a few positives to consider:

Fast Cash

“I don’t mind tossing and turning at night trying to figure out how to cover a financial emergency,” said no person ever. But this could easily be you if life happens and you don’t qualify for a loan from a traditional lender. Or, you could apply for a bad credit loan and upon approval, have the cash directly deposited into your bank account in as little as one business day.

Rebuilds Credit

Most lenders will report account activity from bad credit loans to the credit bureaus. And if you make timely payments, your credit score could receive a slight boost since payment history accounts for 35 percent of your FICO score. Most importantly, paying on time will demonstrate to future creditors that you can responsibly manage your outstanding debt obligations.

Extended Repayment Period

Payday loans are an option if you need a small amount of fast cash, but the lender typically wants to their money back with interest by your next payday and the APR is outrageous! (The APR on a two-week payday loan can be as high as 400 percent, notes the Consumer Financial Protection Bureau). By contrast, bad credit loans are installment loans that usually range from one to five years, so you’ll have the opportunity to pay the loan back over an extended amount of time.

Cons of Bad Credit Loans

There’s also a dark side to bad credit loans, and the long-term effects could easily make matters worse should you be hit with another financial crisis.

Exorbitant Interest Rates

The lender is taking a risk on you, so don’t expect them to cut you any slack on the interest. To illustrate, let’s assume you decide to take out a $2,500, 3-year fixed rate loan for the car repairs that were mentioned earlier.

If you had excellent credit and qualified for a low APR of 6 percent, you would pay $2,737.80 over the life of the loan. And even if your credit was fair and the lender approved the loan with an APR of 15 percent, the total amount remitted would be $3,119.76. But since a bad credit loan is your only option and the APR is a whopping 30 percent, you’ll pay $3,820.68 over the 3-year term.

Fees, Fees and More Fees

Similar to traditional personal loans, bad credit loans are accompanied by a series of fees, including:

  • Origination fees: This fee is assessed to process the loan application and open the loan if you’re approved.
  • Late payment fees: If you’re a minute past the cutoff time on the due date, you’ll be charged a late payment fee.
  • Personal check use fees: You read that correctly. Some lenders will assess a fee if you use a personal check in lieu of an automatic withdrawal or Electronic Funds Transfer to remit payment.
  • Returned payment fees: If the payment doesn’t clear the bank and is returned to the lender, there’s also a fee for that. Also, expect a Returned Item Fee, which could be as much as $36, from your bank.

Automatic Withdrawals

How do you feel when you access your banking information online and discover that money has vanished from your account? Sick to your stomach?

Well, that’s sort of what happens when you borrow from a bad credit lender who requires automatic withdrawals each month. You’ll know that the deduction is coming and may even be able to choose the withdrawal date, but it also makes you feel like a kid who needs their hand held in the grocery store. And if something comes up and you need to adjust the withdrawal date, good luck sorting that out with the lender without coughing up even more of your hard earned cash.

Collateral Requirement

Some lenders will accept you and your tattered credit with open arms, but there’s a catch. If they offer you a secured bad credit loan, you must agree to use an asset as collateral. And if you default on the loan, say goodbye to your shiny sports car, motorcycle or Rolex watch. Ok, those items may be a bit excessive for lower loan amounts, but you get the point.

A Word of Caution

It’s no secret that cash strapped consumers who are in need of bad credit loans can be downright desperate. This makes them easy targets for scam artists. In fact, a quick online search will yield tons of hits for flaky lenders. So if you’re considering a bad credit loan, be wary of lenders that:

  • Don’t require a credit check or proof of income
  • Have scores of negative online reviews
  • Lack accreditation by Better Business Bureau (BBB)
  • Charge fees that were previously undisclosed once the loan is approved
  • Guarantee approvals via unsolicited phone calls

Most importantly, always read the fine print before signing on the dotted line so you’ll know exactly what you’re getting into.

Have you ever gotten a bad credit loan? What was your experience? Share with us and other readers below!

About the author

Allison Martin

Allison Martin

Allison Martin is a digital content strategist and personal finance junkie. Her work has appeared on on a number of reputable sites, including The Wall Street Journal, Investopedia, Daily Finance, MSN Money and Credit.com. She also travels around the nation facilitating financial literacy workshops for nonprofits, governmental organizations, colleges and universities.

6 Comments

  • Ive been paying on my house for ten yrs. Little did i know because it was in house finance they dont report this to credit beauru. What can i do? I have no credit history since my husband died a yr after purchase. Wr were lied to at sale of home that in two yrs of paying we would have good credit

    • You can ask your lender to report to all 3 credit repositories. Hopefully they will agree to do so. If not, call Equifax and ask them how you can report it. Good luck.

    • One more thing. I have been told by a reliable source that they used a service called Self Lender and it raised their credit score quite a bit after making 12 consecutive on time monthly payments. You may want to investigate their service if you are wanting to build your scores.

  • How do I get my score raise up, does it take more than I new account to help me improve. And why are these cars still on my credit report saying I still owe but I do not have the vehicles.

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