While there are many great bad credit loans that come with easy approval, there are even more out there that are ... not so great.
When you need money to pay a bill, you don’t want to spend days going through an elaborate application process for a personal loan—especially when you’re pretty sure you’ll be rejected anyway. You need money and you need it now, which means that you need a loan with easy approval … right?
Not so fast. Easy approval can be great, but it’s not everything. In fact, many of the loans that come with the easiest approval processes are the ones you should be working the hardest to avoid. Before you start submitting applications for an online loan, or dashing down the street to your neighborhood payday lender, learn more about the pros and cons of “easy approval” loans.
1. Payday Loans
When you think “bad credit loan,” what you’re probably picturing is something like a payday loan. These are small short-term loans, with an average term of only two weeks and an average loan amount of a few hundred dollars. The idea behind a payday loan is that the borrower is only borrowing money to “tide them over” until their next payday. The reality, however, is very different.
Payday loans are designed to be paid back all at once, a feature that is often referred to as “lump-sum repayment.” Coupled with annual percentage rates (APRs) that average just under 400%, and it’s easy to understand why many payday loan customers have trouble paying their loans back on-time. The more difficulty they encounter, the higher the cost of borrowing becomes.
When a person is unable to pay back their payday loan on time, they will often do one of the two things: Either they’ll roll over the loan, extending the due date in exchange for additional interest, or they’ll “reborrow” the loan, taking out another loan after the original is paid off in order to cover to additional expenses. Doing this too often can leave borrowers trapped in a recurring cycle of debt from which its difficult to escape.
Payday loans are very easy to secure, which makes them popular with people whose poor credit scores lock them out from traditional lenders. For the most part, all a person needs is a bank account and a valid ID. Some lenders will even loan you money on a prepaid debit card.
Unfortunately, the ease with which these loans can get approved points to the additional troubles that you’ll encounter down the line.
2. Cash Advance Loans
The term “cash advance” is a very generic one, which can make pinning down these loans a bit tricky. For the most part, if you see a storefront or an online lender advertising cash advance loans, what they’re likely offering is a payday loan. They’re offering to “advance” you cash that will be repaid with your next paycheck. For more information on the dangers of payday loans, check out the section above.
The other kind of “cash advance” you’ll see is a credit card cash advance. This is where you use your credit card to get cash, with the amount you withdraw being added to your balance. The APRs for cash advances are usually much higher than the APR for standard credit card transactions, and they don’t come with any kind of interest-free grace period, meaning that the balance starts accumulating interest the second it’s added to your card.
However, those APR’s are far lower than the average APR for a payday loan. (Credit card cash advances often carry an APR in the mid-to-high 20’s versus nearly 400% for payday loans.)
Credit card cash advances don’t require any sort of approval, so just be careful you use them sparingly—if at all.
3. Title Loans
While payday and cash advance loans are both “unsecured” loans—meaning that they do not require collateral in order to be secured—title loans are the opposite. They’re secured by the title to the owner’s car or truck; that’s how they got their name. The main requirement for taking out a title loan is that you own your vehicle free and clear.
Title loans are another type of short-term loan, with average repayment terms that are only a month long. They also let you borrow more money than you’d be able to get from a payday loan—though it’s only going to be a fraction of what your car is actually worth. Title loans have an average interest rate of 25%, which may seem reasonable, but translates to an APR of 300%.
Title loans suffer from a problem that’s similar to payday loans; they carry lump-sum repayment terms that are very difficult for borrowers to repay on time. By extending their loan terms—usually in return for paying only the interest owed—borrowers can prevent the loan from going into default, but they can also rack up thousands and thousands of dollars in extra interest fees in the process.
And if the borrower ends up going into default, well, that means that they sacrifice their collateral. Their car will be repossessed so that the lender can sell it in order to make a profit. In some states, these lenders don’t even have to return any extra funds that they make through the sale. According to a study from the Consumer Financial Protection Bureau (CFPB), one in five title loans ends in repossession.
4. Pawn Shop Loans
You’re probably familiar with pawn shops. These are stores where you bring in your home valuables and then “pawn” them in return for money. What this actually means is that you use them as collateral to secure a small-dollar loan. If the loan isn’t repaid—with interest—by the end of the loan term, then the pawn shop gets to sell your stuff.
Due to the lesser value of the items involved, most pawn shop loans come with principals similar to those of payday loans—in the range of a few hundred dollars. Obviously, the more valuable the item you bring in, the more money you will be able to borrow. And while losing the item probably won’t have the same negative impact on your life as losing a car might (which gives them a leg up on title loans), the sentimental value might be much higher than the retail.
The interest rates on pawn shop loans can vary wildly depending on where you live, with averages between 15 and 240%. Generally speaking, it’s likely that a pawn shop loan will be much cheaper than a payday loan but more expensive than a credit card cash advance. But while pawn shop loans might be safer than payday or title loans, you still risk losing your valuables all for the privilege of borrowing … not a lot of money.
Besides, there are better options available.
5. Installment Loans
Unlike their other bad credit brethren, installment loans are designed to be paid back in a series of regular payments. This means you don’t have to pay the whole thing back at once, which many find helpful.
Interest rates for installment loans vary, but there are many you can find that come with significantly cheaper rates than payday, title, or cash advance loans. If an installment loan is amortizing (which it should be), then every payment you make goes towards both the interest and the principal loan amount.
Most bad credit installment loans do come with a fairly easy approval process—especially compared to loans from traditional lenders like banks—but you should try and aim for lenders whose standards are slightly higher than your average payday loan storefront.
Just make sure you do your research.
Installment loans (and the lenders who issue them) are by no means perfect. Always do your research before working with any lender with easy approval and zero hard credit checks (research that should extend to your own finances). Check customer reviews and the company’s Better Business Bureau (BBB) before signing your loan agreement.
Even better, see if they report payment information to the three major credit bureaus—Experian, TransUnion, and Equifax. This is something that very few no credit check lenders do, but it could end up making a big difference in your score. If you choose the right bad credit installment loan—and make all your payments on time—it’ll do more than just bail out your finances in the present. It’ll help you build a brighter financial future.
And if you really want to do your finances a favor, then skip the need for bad credit loans altogether by building an emergency fund.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.