It seems that people with bad credit get a bad rap. Just because someone has missed a payment on an auto loan or a mortgage or refused to pay an outrageous cell phone bill does not make them a bad person. So why is it that people with bad credit have a stigma, preventing them from financing cars, renting an apartment, or even getting a job?
In fact, lenders who do extend credit to people with bad credit make it so expensive that it seems that it should be illegal. These borrowers with bad credit are subject to enormous down payments, high interest rates, and non-negotiable terms. Two bad credit lenders that are notorious culprits for outrageous lending policies are payday loan lenders and car title loan lenders.
Every once in awhile, ends just don’t meet and payday seems an eternity away. An unexpected situation may even pop up, like a trip to the emergency room or a busted fuel pump on the car, that requires funds that you don’t have. Some people dip into their savings accounts. Others graciously ask relatives or friends to borrow a few bucks. But a great majority of folks have nowhere to turn when they need a little cash and bad credit makes taking out a personal loan from a bank impossible. For families in situations such as this, they may turn to a
bad credit lender as a solution.
Companies such as EZ Money, Advance America, Speedy Cash, and a multitude of pawn shops
are bad credit lenders. The best part about these lenders is that bad credit doesn’t even matter—they don’t check your credit. All a borrower needs is an active checking account, a checkbook, a phone, a utility bill, and a paycheck stub and you can have up to $2000 in your hands, possibly in cash. This may seem like a great option, but remember, these lenders cater to struggling families that can’t borrow money anywhere else so they can’t help but to take advantage of the opportunity. The deal breaker is the amount of interest charged on these short-term loans.
Most of these companies charge anywhere from $15 to $30 per hundred dollars borrowed plus a nominal fee of a dollar and change paid to a third party. For example, for a loan of $650, interest totals $130 (plus the fee). This means on the borrower’s payday, an amount of $782.60 would be due in order to pay the loan off. Of course, if the borrower cannot pay that amount, the borrower is allowed to pay just the interest or finance fee, putting off the loan yet another pay period. Once again interest is charged and it is as if the borrower paid nothing at all. This may not seem so bad, especially when you truly need the money and you plan to pay off the loan in a timely manner. Instead, look at it this way: a loan of $650 that charges an interest fee of $130 over a two-week period carries a 496.66% annual percentage rate. Compare that to 24% APR on credit cards. Now that’s exorbitant! For a person with bad credit and financial distress, this personal loan may seem like a blessing, but in reality these lenders are taking advantage of the unfortunate situation of its borrowers and possibly sending them into even greater debt.
Very similar to the payday loan is the car title loan which also targets struggling families with bad credit that cannot obtain a loan by other means. These lenders use a car title as collateral for the loan. The borrower is often required to hand over the car title and even a copy of the car key until the loan is paid in full. This type of loan is dangerous because a family could lose one of its most valuable items—its car. Additionally, if the borrower defaults on the loan the lender keeps the car, even if the car is worth more than the loan. This could leave the family worse off than it was initially.
These bad credit lenders should be used as a last resort, if at all, because the loans are so expensive. Instead, people with bad credit should attempt to improve their credit so that they might be eligible for personal loans with reasonable interest rates, if they should need one. Credit repair may involve paying down revolving balances on credit cards, making mortgage payments on time, fact-checking credit reports, and possibly debt consolidation.
Another solution is saving. If someone can afford to pay hundreds of dollars of interest when they are in a bind, they can afford to put a little money away in a bank account each pay period. Enough money should accumulate so that when unexpected expenses occur, there will be a cushion to offset some of the costs.
Sadly, many people have become victims of bad credit lenders and succumbed to the cycle of payday loans. Week after week they pay hundreds of dollars in interest. When the loan is finally paid off, they find themselves taking out another payday loan. These lenders encourage borrowers to only use their services as a temporary fix and to perhaps seek credit counseling—even the lender recognizes the danger of using their services! Bad credit loans are expensive and sometimes the cost is more than just money. Beware of the trap!
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