Bad credit history can be a snag to borrowing money, say experts, but they also throw light on the current trends that enable people to borrow money from lenders despite a poor credit rating. It is vital to weigh up the upsides and downsides of personal loan for bad credit.
No recognized financial institutions like banks lend money when your credit report is not up to scratch. Still, private lenders considered it an opportunity to make money by backing financially those with a bad credit scores.
It sounds amazing, but a loan can impact different things, so this is something that cannot be taken lightly. If you fail to pay off the debt on time. You will end up with debt collection agencies chasing you, and they may drag you to court.
Why may you need a Personal Loan?
A personal loan can be used to fund emergencies and planned expenses, but they are ideal for funding big expenses. For instance, you may need money for your wedding. You may need it for medical expenses not covered under your health insurance plan.
You may also need these loans to do up your house or consolidate your outstanding loans and credit card bills. Whatever the reason, you should carefully look at the drawbacks as well. You cannot just make a decision based on the benefits pertaining to these loans.
Is it actually favorable to take out a Personal Loan for Bad Credit?
Now that you know that when you may need a personal loan, there are certain things you need to consider before deciding if it is worth it to take out these loans despite a bad credit rating.
1. Understand the actual APR it may cost you
APR is the annual rate charged for borrowing. The APR a lender charge depends on your credit rating. Since your credit report is not so impressive, this is going to be a bit high.
However, you still have the option of choosing a competitive APR as it can save you money during the overall loan term.
Comparing interest rates is a perfect way to choose the most affordable APR, but remember they are just advertised rates to attract customers. They may not involve all fees associated with the processing of a loan. Hence the actual rate of interest may differ from what you see on the website.
The APR advertised is subject to changes because of your credit history and current financial situation. The poorer the credit score, the higher the APR will be.
Research has discovered that more than 51% of people do not find the advertised APR when they apply for bad credit loans on instant decision in Ireland.
How bad your credit score is and how strong your financial situation is are two crucial factors that determine the APR of your personal loan. Before you apply for a personal loan, you should know the actual APR, so you can see if you can repay the debt on time.
Contact a lender and try to get a pre-approval letter. The actual rate may still vary, but there will not be much difference. They will determine this interest rate by running a soft credit check that does not affect your credit rating. Then, you can use an online calculator to see the size of monthly payments.
Try to have room for extra payments in your budget because the actual cost is definitely going to be up. If you think your budget has scope for meeting all payments despite meeting other regular expenses.
2. How bad your credit score is?
There are various direct lenders for bad credit personal loans on the market, but you are to find out what is the acceptable credit score. Some may be ready to lend you money even if your credit rating is 560, while others may restrict you from borrowing money if your credit score is less than 620.
You should know which direct lender is ready to accept your application, but that is not enough to decide if you should take out a personal loan despite a poor credit report.
You will have to see what interest rates they are charging. If you will be able to cover the cost throughout the loan term from your budget. If not, taking out these loans is not a great idea. Your budget should have the capacity to meet all expenses despite a monthly debt payment.
3. Do you actually need a loan?
You may have various reasons for taking out a personal loan, even if you have a bad credit rating, but you should determine if you actually need it. Do not be tempted to apply for a loan even if you need money.
Think carefully if you can manage without it. If so, you should avoid borrowing money because this will ultimately cost you interest on top of the principal.
At the time of signing the deal, you may think that it is going to work in your favor, but you will realize the actual cost you paid off at the end of the loan duration.
You should think of other alternatives first if you need to borrow money. For instance, you can get help from your friends, colleagues, or parents.
You can avoid paying high interest on the money you borrow. If you need money for a planned expense and you think that you will be able to fill the gap in your savings account, you should wait for some more time to cover the shortfall.
This will help you avoid paying a lot of interest on your debt. You can avoid being embarrassed while asking for financial help from your parents or friends.
For some people, the reason for applying for a person for bad credit is not home refurbishment or wedding or consolidating debt. They just want to use these loans to improve their credit score.
A bad credit score will make it quite harder for you to borrow money at affordable interest rates down the line. A personal loan can help improve your credit rating, provided you stick to the payment plan.
Note that interest rates will be higher, but timely payments will strengthen your credit report. The repayment period of the loan should be at least six months so you can prove your loyalty over a period of time.
Make sure your lender informs all credit reference agencies of your payments. Before you sign the agreement, you must ask if your lender will report your timely payments to credit bureaus. This helps solve your purpose.
To Sum Up
Taking out a personal loan for bad credit can certainly be worthwhile. If you want to do up your house, consolidate your debt, improve your credit score, and the like, but you need to research APR, so you do not end up choosing the higher APR.
Make sure you do not borrow money if you can postpone it. You have alternatives like borrowing from your friends or relatives. Consider how bad your credit score is if you are actually interested in getting the most competitive APR.