When you need cash to deal with an unexpected expense or a major purchase, but you know that your poor credit rating will prevent you from getting most loans, you have a couple of options. You can look for a lender that offers bad credit personal loans to people with bad credit, or you can take out a payday loan.
While bad credit personal loans and payday loans may sound like similar things, they really are not much alike. Take a look at a few things you should know about the differences between the two types of loans and what you should do when you find yourself in need of a loan.
Bad Credit Personal Loans
When people talk about bad credit personal loans, they’re usually talking about a short-term unsecured loan. Unsecured loans are those that are not guaranteed by some type of collateral. If you don’t have to put up your house, car, business, or some other property to get the loan, then it’s probably an unsecured loan.
Unsecured loans usually have a higher interest rate than secured loans, because the lenders risk losing more if they can’t take some collateral if you default on the loan. If you have bad credit, you can expect a still higher interest rate, because you present an even bigger risk. However, the interest rate for an unsecured loan, even a bad credit loan, is usually far lower than the interest rate on a payday loan.
You could take out a bad credit loan for as little as a few thousand dollars, but depending on the lender, you might also be able to get a bad credit personal loan for as much as $25,000 or more. When you’re approved for the loan, you’ll be given a fixed amount of time to pay the loan back. If you find that you can’t make your payments, you may be able to renegotiate the terms of your loan or consolidate it into a new loan with lower monthly payments.
There are many different types of lenders that offer personal loans for people with bad credit. While you may not find many traditional banks that will work with you, online lenders and peer-to-peer lenders often handle bad credit personal loans. Sites like BetterLoanChoice.com can help connect you with prospective lenders.
A payday loan is a type of short-term loan designed to hold borrowers over until their next paycheck. Unlike a personal loan, payday loans are typically small. At most, a payday lender might loan $500 or $1000, and often the amounts loaned are even smaller. A payday loan would not be useful for covering a very large expense. Payday loans come with a very high interest rate. According to the Consumer Financial Protection Bureau, the APR on a typical two-week payday loan can be as high as 400%.
Payday loans are very short-term. Usually, the borrower is expected to pay the loan off with their next paycheck, whether that’s a week, two weeks, or a month away. If the borrower cannot pay the loan on their next check, they usually have the option to pay an additional fee to extend the loan. However, the fees and interest rates on these loans add up quickly, and it’s easy for borrowers to wind up in a difficult-to-escape cycle of borrowing and re-borrowing, because they can’t afford to pay the loan off completely on any one payday.
The one advantage of payday loans is that they’re fast and easy to obtain. Many payday loan sites are available online, and most towns have a few local payday loan vendors as well. To get a payday loan, you’ll need to show proof of income and proof that you have a bank account. You’ll also need to give the lender a post-dated check or permission to access your account to cover the amount of your loan plus a fee. Borrowers who use payday lenders should be wary – it’s possible to be conned by scammers posing as a legitimate payday lending site in order to get access to your bank accounts.
Given the choice between a bad credit personal loan or a payday loan, savvy borrowers should opt for the personal loan. With their high interest rates, numerous fees, and short repayment time, payday loans rarely, if ever, make good financial sense. However, a personal loan can help you cover a large or unexpected expense without leaving you buried underneath a mountain of debt.
This information was brought to you by BetterLoanChoice
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