Consumer finance accounts are loans available for borrowers with poor credit scores. If you are thinking about taking out one of these loans, you should know everything about them, including the different types available. Continue reading to learn more about consumer finance accounts and whether they are right for you.
How Does Credit History and Credit Scores Affect Lending?
Lenders and financial institutions take risks anytime they lend money to borrowers. They use credit scores and credit reports from all three credit reporting agencies to figure out precisely what kind of risk they are taking.
Your credit scores and information on your credit reports are essential factors in determining whether a financial institution or lender will want to work with you. Things like late payments, default accounts, past bankruptcies, etc., will all be on each credit report. Lenders will look at this credit history to determine eligibility, loan amount, and interest rates. Your credit score essentially encompasses all your financial history into a three-digit number, making it easy to understand your financial health and standing.
With a poor credit score or short credit history, you may not be able to borrow from a bank or credit union and instead have to turn to a consumer finance company.
Some Characteristics of Consumer Finance Accounts
Before taking out consumer finance loans it will be essential to know some of the characteristics they usually come with. Here are some things you can expect with these loans:
A Consumer Finance Company Usually Offers Loans With High-interest Rates
Interest rates will be higher with bad credit loans compared to good credit loan options. A consumer finance company will keep its interest rates high because they are taking a risk by lending to borrowers with subprime credit scores. Expect consumer finance account interest rates to range between 30% to 500%, depending on the state you live in and the loan you choose!
Sometimes Secured With an Asset
Many times you will find that consumer finance company loans will need to have an asset as collateral for the loan. These are also called secured loans. This asset will depend on the loan. A general secured loan can have anything of value the lender accepts, such as a car, boat, jewelry, or a home. By offering a secured loan, lenders will have the security of the asset if their borrower does not repay them.
Limited Loan Amounts With Consumer Finance Companies
When borrowing loans from consumer finance company accounts, you can expect the loan amounts to range from a few hundred to a thousand dollars. This is mainly because these companies want to ensure that their borrowers can handle repaying their loan amount.
Usually Are Short Term
Usually, consumer finance accounts are short-term loans, ranging from as little as a few weeks to repay a loan, usually up to a year. And so, if you are looking for a repayment option for several years, like auto loans or home equity loans, these loans will not be the right option for you.
Examples of Consumer Finance Accounts
Here are some loan options that can be considered consumer finance accounts. Read more about them to figure out if they are the right lending option for you:
Payday loans are an extremely short-term financing option that falls under consumer finance accounts. Payday lenders may seem like a good place to start with bad credit, but these loans can quickly lead to a cycle of debt. They come with extremely high-interest rates and have the shortest repayment periods, which makes monthly payments challenging. In most cases, borrowers only get a few weeks to repay their loans. And so, think twice before you apply for a payday loan!
Car Title Loans
Car title loans are a secured loan option that uses a vehicle as collateral. The loan amount and eligibility will largely depend on the car’s value. Like payday loans, car title loans have incredibly high interest and can be challenging to repay. Their loan amounts can range from a few hundred dollars to a few thousand, and repayment is usually a few months. If you cannot repay your title loan or break anything with the loan contract (such as insurance coverage), your lender will have the right to repossess your vehicle. And so, there is a considerable risk involved with these loans.
Another example of a consumer finance account is in-store financing. You will often find this option with retailers who sell furniture, appliances, jewelry, and other big ticket items. With this, you get to take the item right away and pay the store monthly until repaid in full. The interest rates for these loans can be pretty high, so think twice about in-store financing. Some retailers may offer a credit line that is backed by a financial institution. However, in most cases, you will need good credit to be eligible for this type of financing.
What Do I Need for These Consumer Loans?
If you want to apply for a consumer finance account/bad credit loan, you will need some information. Keep in mind that you will need similar documents when applying for traditional loans:
A Government Issued Photo ID
You can use your driver’s license, passport, permanent residence card, State ID card, military ID, etc.
Proof of Income
You will need to provide your lender with proof of income. You can use documentation like pay stubs, bank statements, invoices, letters of income, etc., depending on your income type.
Proof of Residency
Another thing you will need to show proof of is where you live. You can use documents like mail, utility bills, bank statements, a lease or mortgage statement, or any other official document with your address. Essentially anything that a DMV will likely accept for proof of residency should work with a lender.
Documents for an Asset if an Asset Is Involved
If an asset is involved with a loan, for some things, you will need documentation proving that you own the asset. For example, for a car, you will need the car’s title.
How Do Consumer Finance Accounts Affect Your Credit?
Although borrowing money from a consumer finance account in itself may not be the worst thing for your credit right away, there are some ways that things can go wrong quickly. Here are some ways that the loan itself and your actions with it can affect your credit:
Your Credit Utilization
Your credit utilization measures the amount of debt you have against your available credit. This ratio should stay under 30% to positively affect your credit score. Adding a new loan to your credit profile may cause your balance to exceed that recommended percentage and can hurt your credit score.
Payments on the Loan
How you make your payments on your consumer finance account will significantly impact your credit score. Payments on time can help your score, while late payments seriously hurt it. Unfortunately, loan options with higher interest rates can be challenging to pay back on time.
Missing multiple payments can lead to loan default and other consequences. When this happens, it can really hurt your credit scores. Loan default will stay on your credit reports for up to seven years, making it difficult to get funding in the future.
If you cannot pay your debt, your consumer finance company can turn to a debt collector to get funds. If your credit account goes into collections, that information will appear on your credit reports, and getting to that point will substantially harm your credit scores. Collection agencies can also take you to court for unpaid debt, usually done as a last resort.
Bad Credit Personal Loans as an Alternative To Other Consumer Credit Accounts
If you need funding through a bad credit loan option, consider bad credit personal loans. Although these loans will not be as competitive as traditional loans for borrowers with bad credit, they will beat other consumer credit account options.
Personal loans come with competitive interest rates, flexible repayment, and more variety in the loan amount. And so, if you need funds with bad credit, start with bad credit personal loans! You can find them with online lenders usually.
How Can I Improve My Credit Score for Better Loan Options?
The best loan options will be available if you have a good credit score. You’ll get the best rates and most flexible payments out there. Here are some tips to help you get there:
Pay Your Bills on Time
One of the most important things you can do for your credit score is to pay your bills (specifically on your credit accounts) on time. Your payment history makes up 35% of your credit score, the largest factor impacting it! And so, even if you miss one payment, it can hurt your credit score.
Avoid Unnecessary Debt
As mentioned above, you should keep your credit utilization ratio under 30% for a positive impact on your credit score. One way to accomplish this is to avoid unnecessary debt, especially if it is considered “bad” debt. Bad debt is any type of debt that is unnecessary or doesn’t help you in the long run. Think credit cards and loans for frivolous spending. A lot of bad debt will eat at your income and look bad to potential lenders.
Pay Off Debt
Paying back as much debt as possible will be helpful because it will free up your income and help your credit utilization ratio.
Diversify Your Credit
Your credit mix is an essential factor when it comes to your credit score. A good credit mix will have diverse credit accounts rather than one type. With bad credit, it can be difficult to borrow from different loan options but adding a cosigner or having a co-borrower can help you reach those financial milestones. At the same time, remember to consider your credit utilization ratio.
Get All Your Payments Reported
If you are just getting started with building your credit, you likely won’t have access to loans or credit cards that can be reported and help you build credit. To help develop a payment and credit history, you can have payments like your rent, utilities, and cell phone bill reported to all three credit bureaus! These options can be a great starting point to help you build a positive credit history!
The Bottom Line With Consumer Finance Accounts
Consumer finance accounts are bad credit loan options. They can definitely help you if you need emergency funding, but most of them come with high-interest rates and usually a short payment schedule. If you decide to take out one of these loan options, ensure you can repay it on time. Bad credit personal loan will be your best choice when taking out a consumer finance account. You can also try and improve your credit to qualify for traditional loans.
If you want to know more about finance and credit, like what Teletrack is, check out the rest of the CreditNinja Dojo!