As the name itself suggests, bad credit loans are given to people who have a bad credit score or have no credit history. People who have a bad credit score find it far more difficult to secure a loan as the number of available options is limited.
Luckily, bad credit loans are specifically designed for borrowers in those situations. These loans are a good option if you are in a struggle to get a loan that you desperately need. There are several advantages and disadvantages to this type of loan, as with any other.
Most often people end up with a bad credit score if they do not have enough assets to pay off loans, if they have a history of falling behind with monthly payments, unstable employment history, or if they have no credit history as we mentioned above. Since bad credit loans are fairly unknown to many borrowers, we decided to name everything that you need to know about them.
Credit Checks
As with any other application for a loan, credit checks are done with bad credit loans as well. A credit check is done by the lender (bank, online lenders, credit unions, etc.) with the purpose to take a look at your financial behaviour. Most often, they need to know whether you paid previous loans on time and how much credit you have at the moment.
There are two types of credit checks — hard and soft. A hard credit check is a detailed look at your credit history. Each hard check is recorded on your report and any company that searches it will be able to see that you’ve applied for a loan. Furthermore, hard credit checks have an impact on your score and they can lower it by up to 20 points, depending on the country and specific policies.
Soft credit checks, on the other hand, are not as detailed and strict as hard credit checks. Their purpose is to decide how successful your application would be without a full examination. Unlike hard credit checks, soft checks are not recorded, thus not visible to companies that are searching for information. Your credit score is not impacted by this type of check.
This is just a small comparison between the two and that is why you should read soft check and hard check explained down to their latest detail. They are definitely worth knowing, especially if you are planning to apply for a loan.
The Pros and Cons of Bad Credit Loans
The first and obvious advantage with bad credit loans is that you can apply for an amount that you would not get accepted in other circumstances. The approval time for this type of loan is usually fast and you might end up with the amount that you applied for in a short period. Fast cash is the biggest advantage of a bad credit loan.
The only con that this type of loan has is the interest rates. Because you are an ‘insecure borrower’, the interest rates that are applied are higher than the ones of standard loans. Your mission is to pay off your debt and find a way to improve your credit score.
Types of Bad Credit Loans
People that apply for bad credit loans are likely to be offered two types — guarantor loans and unsecured loans. Guarantor loans allow you to get money and designate a friend or a family person that will guarantee the loan repayments. If you are unable to pay it off, the guarantor is legally liable to continue the payments. Unsecured loans are the complete opposite — you do not need to offer any assets as collateral.
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