What’s a bad credit loan?

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A bad credit loan is a loan made to a person who has credit that is considered poor and is likely to be turned down for more conventional loans. These types of loans can be short-term unsecured loans, such as a payday loan or a bad credit vehicle loan. In most cases, the terms for bad credit loans do not favor the borrower.

For those who find themselves in bad credit situations, a bad credit loan may seem like a good option. In most cases, no credit check will be required. However, with increased risk for the lender of such personal loans, comes an increase in the interest rate for the buyer. In other words, if the lender is going to put up money for what may be a bad loan, they will demand a more significant return on investment.

For vehicles, a bad credit loan works much like an unsecured loan, except that instead of having no collateral, the vehicle is put up as collateral. In these cases, the terms can be very strict. Even a late payment can be grounds to repossess the vehicle. In fact, this is how some unscrupulous used car dealers can sell the same car over and over again. In general, it is best for buyers to avoid this type of situation, as even the best borrower can be late on a payment from time to time.

The other type of bad credit loan that gets a fair amount of attention is the short term loan. These are often called payday loans, since that is generally when the terms of the loan are due. While many people may refer to them as a cash advance, they also have rigid terms. In fact, to avoid usury laws in some jurisdictions, due to extremely high interest rates, the costs associated with the loan are often called fees.

Those interested in a bad credit loan can also consider alternatives, such as a secured credit card. This type of card requires you to make a deposit, and then a line of credit is extended, usually about 150 percent of the amount deposited. Also, these types of secured credit cards are reported to the credit bureaus, which will help build credit. Many other places that offer bad credit loans do not report to the credit bureaus.

If an individual decides to seek a loan with bad credit, special attention should be paid to understanding all the details before signing any agreement. Often, those in such situations can find themselves in an even worse situation after signing such an agreement. When shopping around, especially for used cars, it is possible to find terms that are much more favorable. Even reputable car dealers may have plans for those with bad credit.

Smart Asset.

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