Before Taking out a Bad Credit Loan, Make Sure You Do the Math

First of all, you need to figure out how much this bad credit loan really costs. Second, you’ll need to check whether or not you can afford the proposed payments.

Bad credit loans can serve a very useful purpose in people’s lives. When you have a financial emergency and don’t have any savings to cover it, these products can help you keep your financial ship afloat.

But that doesn’t mean that you should be taking out the first bad credit loan you see. Like with any other financial obligation, you need to do your research and find the product that works best for you.

And with bad credit loans, that means doing some math.


First, figure out the APR.

Bad credit loans come with higher interest rates than standard personal loans. That’s unavoidable. Due to the increased risk of default, bad credit lenders have to charge higher rates than lenders that only work with good credit borrowers.

But some lenders charge rates that are way higher than others. And if you’re not careful, you could end up with a much more expensive loan than you could otherwise qualify for.

This is especially true with short-term bad credit loans like payday loans, cash advances, and title loans. These products are designed to be paid back in a matter of weeks, not a matter of years, and that can distort how much they actually cost compared to standard personal loans.

In order to make an apples-to-apples comparison between different types of loans, it’s best if you look at their annual percentage rates, or APRS, instead of their stated interest charges. APR measure how much a loan will cost (including fees and interest) over the course of a full year.

Here’s an example:

A typical two-week payday loan comes with an interest rate of $15 per $100 borrowed. So if you were to borrow $300 with a loan, you would be paying back $345 on the loan’s due date, which would be set for 14 days in the future.

A 15 percent interest rate doesn’t sound too bad, right?

But remember, that loan is charging you rate of 15 percent over only a two-week period! If you were to roll over or reborrow that loan—something that it all too common—you would end up paying an additional 15 percent for those next two weeks.

Let’s look at that payday loan’s APR. a 15 percent rate charged over 14 days comes out to an APR of … 391 percent! This gives you a better idea of how much costlier this loan is than a standard personal loan.

As we said, bad credit loans are always going to more expensive than the kinds of loans offered to people with good or fair credit. But that still means you should be shopping around to find the least expensive loan available.

Can you afford your payments?

Of course, finding the loan that will cost you the least amount of money overall isn’t everything. Because while short-term no credit check loans like payday loans will cost more on paper than a bad credit installment loan, you could very well end up with a nasty surprise.

Namely, you might find that you have trouble paying off your short-term loan on time, forcing you to roll it over and extend the due date (in return for more interest) or take out another loan immediately after you pay off the old one. Either way, your cost of borrowing starts to go up. And fast.

It’s not like this is uncommon, either. One report from the Consumer Financial Protection Bureau found that the average payday loan borrower took out 10 loans a year. A short-term solution? It sure doesn’t seem like one!

So what gives?

Well, the problem with many short-term loans has to do with their payment structures. Namely, it’s the fact that the loan is paid off in a single lump sum. As it turns out, this single balloon payment can be difficult for many borrowers to afford!

Sure, the idea of getting yourself out of debt quick sounds appealing. But there’s a flipside: The quick turnaround for payday and title loans means little to time to save.

With such a large amount of money getting debited at once from your bank account, you might find yourself with another financial shortfall, with bills to pay and not enough money to cover them. All of a sudden, you’re right back where you started.

Before taking out any bad credit loan. You need to take a long, hard look at your budget and your cash flow. If the proposed loan payment isn’t something you can afford, then this product is going to cause more problems than it solves.

According to one study from the Pew Research Centers, well over 80 percent of payday loan borrowers didn’t have enough money in their monthly budgets to cover their loan payments. When that happens, you could easily find yourself stuck in a recurring (and expensive!) cycle of debt.

Checking your ability to repay.

One way to avoid this is to find a bad credit lender who checks whether or not you can afford your loan. That way, you are receiving an extra layer of protection against taking out a product you can’t afford.

Checking your ability to repay is different from checking your credit score. While hard credit checks show up on your credit report (and will likely ding your credit score), a soft credit check or income verification won’t get recorded and won’t affect your score.

When you have bad credit, it’s all too easy to get taken advantage of by a predatory lender that doesn’t care whether or not you can afford your loan. But skipping out on “guaranteed approval” loans can help you avoid them.

Before you click “I agree” on that online loan agreement, take some time and do the math. You won’t regret it. To learn more about how you can protect your financial future, check out these other articles from OppLoans:

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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.