To say that we live in uncertain times may be the understatement of the century. Now more than ever many Americans are struggling to pay their bills, their rent, and to make ends meet in general. It’s times like these when people turn to short-term financial solutions to solve their problems. But choosing the wrong short-term loan could mean adding to your financial problems in the long term.
That’s why we’ve put together this guide to choosing the best bad credit loan for your situation. Read on to learn more about what bad credit loans are, and what to look for when shopping for one.
What is CreditNinja?
CreditNinja is a premiere online lender, designed to help borrowers in need. We offer multiple loan products so each customer can find the right loan for their specific financial situation. At CreditNinja, we care about our customers and their financial wellbeing, which is why we devote ourselves to providing our borrowers with plenty of resources for financial literacy.
Because we specialize in bad credit loans, we strive to provide as much information as possible about them, and how they work. This way our customers can be informed and educated about all the financial products available to them. The CreditNinja Dojo is a great resource to learn more about personal finance, credit, budgeting, and more.
If you’re in a tough financial situation and you’re looking for answers, you’ve come to the right place. Read on to learn more about what bad credit loans are, how they work, and how to choose the best one for your financial needs.
What is Bad Credit?
In order to really understand bad credit loans, first you’ll need to be familiar with what bad credit is. Bad credit usually refers to a low credit score, or a poor credit history. This means you may have a lot of debt, or perhaps you’ve missed payments in the past for your loans or other bills. These are just a couple of factors that can lower your credit.
The most common scoring model for credit would be the FICO score. This comes from Fair, Isaac & Company which is a data analytics company. There are other credit scoring models out there, this is just the most commonly used one. The score ranges from 300 to 850, with a higher score being better. Here’s how the scores break down:
300–579: Poor credit
580–669: Fair credit
670–739: Good credit
740–799: Very good credit
800+: Excellent credit
Having a higher credit score means being eligible for better, more affordable loans and credit cards. A few of the best ways to improve your credit score are to make payments on time, reduce your overall debt, and keep your credit card usage low.
What Are Bad Credit Loans?
So what is a bad credit loan? On the surface it may seem simple: it’s a loan for a borrower with a poor credit history or credit score. But as with most financial products, there are many facets involved that make choosing one a complicated process. There are so many different types of bad credit loans out there, each with their own unique terms, conditions, and interest rates.
With so many different kinds of loans to choose from, it can be difficult to know which one is right for your specific financial situation. Below are a few of the most common types of bad credit loans, and a brief description of how they work:
Payday Loans—These are some of the most common bad credit loans out there. They’re small-dollar, high-cost loans that borrowers take out in order to stretch their finances until their next payday, hence the name. This means they typically need to be paid back in about two weeks. Usually borrowers only get a few hundred dollars, which they use for bills, rent, utilities, or a financial emergency. But because the loan term is so short, these loans can be difficult to repay. Make sure that you’re able to repay it if you decide that a payday loan is your best option.
Pawn Shop Loans—This is a secured loan that you take out from a pawn shop. Secured simply means that in order to get the money you need to offer the lender something in return, for them to hold onto until the loan is repaid. The item that you give the lender is referred to as “collateral.” With pawn shop loans, the collateral could be any valuable item. The lender will assess the value of the item, and give you a loan that is equal to a fraction of the value of the collateral. If you don’t repay the loan by the agreed upon date, they can sell your item to recover their money. These loans are risky because you’re taking the chance of losing something that’s valuable to you.
Title Loans—A title loan is similar to a pawn shop loan because it’s also a “secured loan.” The big difference is that with a title loan, the collateral you offer to the lender is your vehicle. The lender will assess your vehicle to determine it’s worth, and then offer you a loan at a fraction of the vehicle’s value. The same risk applies with title loans but on a larger scale. If you can’t repay the title loan, the lender will repossess your vehicle and sell it. Even with the security of collateral, these loans can carry high interest rates. It’s wise to avoid this type of loan if you need a vehicle for everyday things like getting to work and buying groceries.
Personal Installment Loans—A personal installment loan can be a great alternative to many other short-term loan options out there. This is a personal loan that the borrower repays through monthly installments over a set period of time. Oftentimes, customers can get more money through a personal installment loan than a payday or pawn shop loan. And the repayment terms are usually more favorable as well. With these loans, you can spread your payments out over a longer period of time, making your monthly financial obligations more manageable.
Choosing the Right Loan for You
The most important part of choosing a new loan, is making sure that you pick the right one for your financial needs. Make sure to consider how much money you actually need, and don’t take out more than that amount even if more is offered. Also consider how long it will take you to repay it, and whether you can afford the payments. If you can’t afford the payments then the loan will likely end up hurting your credit score in the long run.
For more tips and information on credit scores, loans, and personal finance check out the rest of our blogs in the CreditNinja Dojo!