What is a Bad-Credit Loan?

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  • Written By: Ken Black
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 May 2020
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A bad-credit loan is a loan made to a person who has credit that is considered poor and would likely be turned down for more conventional loans. These types of loans may be unsecured, short-term loans such as a payday loan or a bad-credit loan for a vehicle. In most cases, the terms for bad-credit loans do not favor the borrower.

For those who find themselves in situations with poor credit, a bad-credit loan may seem like a good option. In most cases, no credit check will be required. However, with an increased risk to the lender for such personal loans comes an increase interest rate to the buyer. In other words, if the lender is going to put up money for what may be a bad loan, they will be demanding a more significant return on investment.

For vehicles, a bad-credit loan works very similar to unsecured loans, except that instead of having no collateral, the vehicle is put up as collateral. In these cases, the terms may be very strict. Even one late payment may be grounds for repossessing the vehicle. In fact, this is how some unscrupulous used car dealers are able to sell the same car time and time again. In general, it is best for buyers to avoid this type of situation as even the best borrower may be late on a payment once in a great while.

The other type of bad-credit loan that gets a fair amount of attention is the short-term loan. These are often referred to as payday loans, as that is generally when the terms of the loan are due. While many people may refer to them as a cash advance, they also have stiff terms. In fact, to avoid usury laws in some jurisdictions, because of extremely high interest rates, the costs associated with the loan are often called fees.

Those interested in a bad-credit loan may also wish to consider alternatives, such as a secured credit card. This type of card requires you to place a deposit, and then a credit line is extended, usually approximately 150 percent of the deposited amount. Further, these types of secured credit cards are reported to credit bureaus, which will help build credit. Many other places offering bad-credit loans do not report to credit bureaus.

If an individual does decide to pursue a bad-credit loan, careful attention should be made to understanding all of the details before signing any agreement. Often, those in such situations may find themselves in an even worse situation after signing such a deal. By shopping around, especially in the case involving used cars, it may be possible to find terms that are much more favorable. Even reputable car dealerships may have plans in place for those with bad credit.

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