High interest rates and short repayment terms are a good start, but you should also find a lender that checks your ability to repay!
Bad credit loans can be a workable tool to help people bridge unforeseen financial gaps, but the wrong loan can leave you trapped in a bad cycle of high-interest debt. In order to avoid predatory lenders, here are five warning signs that you should use to sort out the good loans from the not-so-good.
1. Ridiculously high APRs.
When you have bad credit, you’re shut out from borrowing at traditional lending institutions. And the kinds of loans you will be able to get approved for are going to carry higher interest rates due to the increased likelihood that you (and other customers) will default.
But there’s a limit. And predatory lenders charge interest rates that go way beyond it. You might not be able to tell just by looking at their stated interest charges, but some of these loans cost could be charging over 40 times what standard personal loans would charge—or even more!
We’ll cover more about the dangers of short-term bad credit loans in the next section, but we can’t talk about the sky-high high interest on these loans without mentioning them. That’s because the interest rates on short-term loans can obscure how expensive they are compared to regular loans.
Why is that? Well. your standard personal loan states its interest rates on an annual basis, while short-term loans state their rates on a weekly or monthly basis. This is why you should use a loan’s annual percentage rate, or APR, to measure its true cost.
Once you do that, the high rates of these short-term predatory loans will become clear. For instance, if you borrow a two-week payday loan with an interest charge of $20 per $100 borrowed, that 20% fee would seem a little high, but nothing too bad. However, that two-week loan carries an APR of 520%!
2. Short terms.
Then again, if you’re borrowing a two-week bad credit loan, why should you care about how much it’s costing you on an annual basis? After two weeks, you’re going to pay off the loan and free and clear … right?
Maybe not. Short-terms not only mean higher overall rates, but they also carry with them some other serious obstacles, ones that could prevent you from paying your loan off on-time. Once you’re forced to rollover or re-borrow a loan, those costs start adding up. Fast.
One of the primary issues with short-term loans is that … well …. they have such short repayment terms! What seems like an easy way to get out of debt fast turns into the opposite: A loan that becomes much too difficult to pay off.
A lot of this comes down to the size of the loan’s payments. With short-term loans, you’ll pay them all off in a single lump sum. It’s convenient, sure, but that single large payment can leave people right back where they started: After taking out a payday loan to bridge a financial gap, they find themselves facing a brand new gap.
Studies bear this out. According to one report from Pew Research Centers, well over 80% of payday loan customers didn’t have enough money in their monthly budget to cover their loan payments. And a study from the Consumer Financial Protection Bureau (CFPB) found that the average payday loan customer takes out 10 such loans every year.
When you’re looking for a bad credit loan, consider seeing what installment loans are available in your area. Since these loans are paid off a little bit at a time, their smaller payments might fit more easily into your budget than a short-term payday loan, title loan, or cash advance.
If you can easily make your payments without having to roll over, reborrow, or refinance, that’s a sign that you found the right bad credit loan for you. Heck, some installment lenders even report payment information to the credit bureaus, which means that paying your loan off on time can help improve your credit score!
3. They don’t check your ability to repay.
One of the appeals of no credit check loans is right there in the name: This is a lender that won’t be checking your credit. Hard credit checks will often lower a person’s score, after all, and when you’ve got lousy credit, that’s the last thing you need!
But there is a difference between not checking your credit score and not checking your ability to repay. And even if a lender isn’t doing the former, they definitely should be doing the latter. If they’re not, you should take that as a flashing red warning sign.
Even if a lender isn’t hard checking your credit score, there are still ways that they can check your ability to afford a given loan. One thing they can do verify your income. Another way is by running a soft credit check that won’t affect your score.
Lenders that don’t do any of the things are sending a message loud and clear: That it doesn’t matter to them whether or not you can actually afford your loan. And if you have to roll over your loan or take out a new loan immediately after paying off your old one, that’s all the better for them.
Finding a company that checks your ability to repay is a great way to avoid predatory bad credit lenders. Otherwise, you could find yourself trapped in an unceasing cycle of debt, taking out loan after loan without ever getting closer to being out of debt.
4. Hidden costs or fees.
You’ll find these with bad credit and no credit check loans, but they can be even worse when it comes to products like secured credit cards and debit cards. In some cases, you could end up paying exorbitant fees simply to access money that’s already yours!
This is why it’s critical that you read the fine print before signing up for any financial product, whether that be a loan, a credit a debit card, or a lease. And if a product comes with lots of hidden fees or extra charges, then that’s a sign that this not the product for you.
5. Poor customer reviews.
One of your best resources for unbiased information on a lender or finance platform is going to be people like you. So before you sign yes on that online loan agreement, check out that company’s reviews to see what their other customers are saying!
Sites like LendingTree and Google are a great place to start, but you should go deeper than that. Visit the company’s social media pages to see what kind of experiences customers are reporting. Better yet, visit their BBB page to see a) whether they even have a BBB page, and b) what kind of rating they’ve received!
There isn’t a 100% surefire way to avoid predatory lenders—even if you have good credit! But heed these warning signs, and you should put yourself in a position to find the bad credit loan that works best for you.
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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.