Things To Consider Before Jumping Into A Payday Loan With Bad Credit
Your credit score indicates your trustworthiness. The greater the score, the more creditworthy you seem. Lenders use this three-digit number to predict how you will treat their credit line, based on your credit history.
Additionally, it isn’t just lenders that run a credit search before providing their services. Most businesses do so as well these days. This indicates that a bad credit score can affect you in every way, from your ability to get a job to your chances of renting an apartment.
How Bad Credit Affects You
Let’s take a more detailed look at how a bad credit score affects you:
1. Difficulty Procuring Financing
The first and most obvious effect of bad credit is difficulty in procuring financing. You won’t be eligible to apply for credit cards and most type of loans. The only loans available to you will be those with very high interest rates and fees, such as a payday loan.
2. Difficulty Getting Approved For An Apartment
Most realtors and landlords do a credit search on you before approving a rental application. Thus, having bad credit can make it difficult to rent an apartment. Even if the landlord accepts an application, a low credit score often means a higher security deposit.
3. Difficulty Procuring Utilities
Utility companies – phone, cable, electricity – check your credit history during the application process. If you have a bad credit history, they ask for a security deposit to establish a service. Moreover, even mobile phone companies do a credit search; and based on your credit history may only allow you a prepaid service.
4. Difficulty Getting A Job
Certain jobs, particularly in upper management or the finance industry, require you to have a good credit history before they are approved. However, they only check your credit report to know of items that could affect your job performance.
5. Difficulty Getting Insurance
Though it is not the only criteria considered, most insurance companies determine risk by looking at your credit history. Typically, if your score is bad, they will assume more risk and vice versa. This means the lower your credit score, the more you will pay as premium.
What Happens When You Take A Payday Loan With Bad Credit
To be fair, a payday loan may be one of the only funding options available to you when you have bad credit. It is a small short-term loan that can help you out until your next salary day. It is, therefore, a great option during minor financial emergencies.
However, payday loans come with very high interest rates and fees, and very short repayment periods. Thus, if you are unable to repay the loan, it only adds to the bad credit in your credit report. To add insult to injury, payday loan lenders generally have really poor and unethical practice.
Not only do they come after you relentlessly while trying to get their money back, but they also hard-sell their products. Thus, you end up taking another loan in order to repay your first one. This leads to an endless cycle of debt and a lowering of your credit score even further.
What Are The Alternatives Available?
Luckily enough, there are alternatives available; pay day loans bad credit among them. These bad credit personal loans are instalment loans. This means that you can pay it back in instalments over a longer period of time than available for payday loans.
This factor might make a bad credit personal loan a better option than a payday loan, depending on the terms. However, interest rates and fees for these loans are also pretty high. Therefore, it might be a good idea to calculate the costs before signing the dotted line.
Factors To Consider Before Applying
Whether you go for a payday loan or a bad credit personal loan, there are certain factors you must consider:
Interest rates for payday loans are calculated either as flat interest or as an Annual Percentage Rate (APR). The APR for payday loans could go up to 1000%. Additionally, the amount could increase even more depending on the time you take to repay the loan.
While APRs may seem more expensive, flat interest rates actually cost more. This is because flat interest rates are calculated based on the principal amount borrowed at the end of the loan term. APRs, meanwhile, are calculated on any remaining amount to be paid.
The interest rates for bad credit personal loans are pretty high as well. You can minimise this cost by paying more than the minimum payment due on your loan each month. However, make sure that your loan terms and conditions do not have a prepayment penalty before you do so.
In addition to the interest rates, you may be charged additional fees like the origination fee, late fee, insufficient funds fee, prepayment penalty, etc.
The origination fee is a one-time fee that is charged to process your loan application. It’s added to your loan amount and paid when your funds are issued. It could also be taken from your loan proceeds.
The late fee, as the name suggests, is the additional amount you have to pay when you cannot repay your loan on time. The insufficient funds’ fee, meanwhile, is charged if you do not have enough money in your bank account to cover an automatic cheque. Lastly, the prepayment penalty is a fee charged by some lenders when you pay off some or the entire loan early.
Whether you take a payday loan or a personal loan, you must consider the repayment term carefully. Calculate what monthly payment you can afford and for how long. Additionally, remember that while a longer loan term may seem more affordable, with the high interest rate, it would probably cost more.
To conclude, a payday loan is a great option when you’re facing a financial emergency and have bad credit. But, there are other options available that may be more affordable. So always compare and choose the one that best suits your requirements.