Getting a loan can be a great way to make a purchase but pay for it over a term that suits you. Loans can be used for anything you want, from buying a car to making home improvements. But if you have a low credit score you may find it harder to get approved for finance or you may not get the best deal possible. For example, buying a car with a bad credit loan could make your car more expensive overall due to higher interest rates. For people with a low credit score, their options may be limited, and getting a bad credit loan could be the only way to borrow money.
The guide below looks at the advantages and drawbacks of getting a loan or finance with bad credit.
What is A Bad Credit Loan?
A bad credit loan is simply one that is designed for people with low credit scores. A bad credit score can make it harder for you to get approved for finance. This is because lenders make predictions based on your past financial behaviors. You may find yourself with a low credit score due to missed payments, late repayments, defaults on your credit file, bankruptcy, or no previous history of borrowing. All of which increase the risk to lenders and can put them off. Bad credit loans can have higher interest rates but are a way for those with bad credit to get access to a loan.
Benefits of Getting A Bad Credit Loan
There are many reasons you may be looking to secure a loan, if you wish to buy a car with bad credit, a bad credit loan could be the solution you are looking for. They can also be used to consolidate debt, wedding expenses, and even buy a holiday. Let’s take a look at the main benefits of bad credit loans.
#1. Makes Lending a Reality:
For people with bad credit, they may struggle to get a loan and may even be refused by lenders. A bad credit loan can help turn getting a loan from a dream to a reality. Whilst a may not be the most cost-effective way to borrow money, it can open doors for people who may have struggled to get a loan.
#2. Better than Other Options:
Bad credit loans are better than other loan options such as payday loans. Payday loans are short-term loans for small amounts but usually have very high interest rates and can lead to much worse financial implications.
#3. Spread the Cost:
The main benefit of getting any loan is the ability to spread the cost into affordable monthly payments. It can be hard to save the amount you need, but a loan allows you to get the money but then make monthly installments over a number of years.
Drawbacks of Loans for Bad Credit
It wouldn’t be fair to only look at the advantages of getting a bad credit loan without considering why it may not be the right choice for you.
#1. You Could End up Worse Off:
If used correctly, car finance can be used to improve your credit score. By meeting all payments on time and in full, you can show future lenders you can be trusted to pay off your loans. However, if you’re prone to missing payments or making late repayments, it can put you in a worse position than when you first started. Bad credit loans should only be considered if you feel you could be responsible enough to handle the payments and afford to pay it back.
#2. High Interest Rates:
Finance lenders offer their lowest interest rates to those with the best credit scores as a reward for good financial management. People with bad credit can be offered high interest rates as a way to secure the loan and reduce the risk. Borrowing money this way may not be the cheapest way to get a loan as higher interest rates affect how much you pay overall.
#3. Secured Loans:
A secured loan is when the lender owns the asset they buy on your behalf. For example, hire purchase car finance is a secured loan and is where the lender buys the car from the dealer and you make monthly payments back to the lender. The issue with secured loans is that if you fail to keep up with your repayments, it means the lender has the right to take the car away from you.