Getting a loan when your credit is bad can be a major challenge. The normal avenues open to folks with good credit can close up when you approach a lender. For those in this situation, a bad credit loan may be one of the only options. Unfortunately, this option comes with a lot of risk. Here’s everything you need to know about bad credit loans, including the best ways to spot a potential scam.
What Are Bad Credit Loans?
Bad credit loans are loans that are offered to people with a poor credit history. There are several types of bad credit loans:
- Cosign loan: When a lender can’t rely on the borrower due to their bad credit, they may have a more reliable individual come in on the loan as a cosigner. Basically, the cosigner agrees to pay the loan if the primary borrower defaults on their payments.
- Secured loan: A borrower can get a secured loan by using their existing assets as collateral. A security deposit is required.
- Unsecured loan: A borrower can get a secured loan by using their existing assets as collateral. A security deposit is not required.
- Cash title loans: These are loans given to a person with bad credit based on the value of their vehicle.
- Home equity loan: These are loans given to a person with bad credit based on the value of their home.
- Payday loans: These are short-term loans given to individuals. They have very high interest rates and the borrower may have to renew the loan if they can’t repay it on time.
- Mortgage or housing loan: This is a loan used to purchase a home. Compared to a standard mortgage, a bad credit mortgage loan has very high interest rates. This is also sometimes known as a sub-prime mortgage.
Pros Of Bad Credit Loans
The following are the benefits of getting a bad credit loan:
- Fast money: You can often get money faster with a company willing to loan to those with bad credit. This is really helpful when you need money fast.
- Get back on track: For people who have fallen on hard times, a bad credit loan may be their only option when it comes to paying for their expenses. However, if the borrower uses the loan wisely and pays it back as quickly as possible, it may be a great solution to help them get back on track rather than constantly falling behind on their bills.
Cons Of Bad Credit Loans
The following are the drawbacks of getting a bad credit loan:
- Scams: There are a lot of lenders out there who are only in the business to rip off people with bad credit. If there’s no need for a credit check with a loan, proceed with caution as it could be a possible scam. It’s especially important to protect your personal and financial information when you’re not sure if you can trust a lender.
- High interest rates: Loans for people with bad credit often come with very high interest rates. This can add up quickly over time, so if you’re not able to pay back a loan in a short amount of time you could end up owing much, much more than you borrowed.
(Also read: 4 Different Types Of Loans To Avoid.)
Tips For Spotting Scams
The most important thing to know about bad credit loans is that many of the lenders are actually scam artists. It’s critical that anyone considering getting a bad credit loan is very cautious about which lender they borrow from. Here are some tips to help protect yourself from potential loan fraud:
- Don’t give out your personal or financial information over the phone or online.
- Don’t send a large upfront payment before you have a guaranteed loan.
- Don’t give any information or money to a lender that does not require a loan application.
- Watch out for catchphrases like “Bad credit? No problem.” and “We don’t care about your credit history” as these are red flags for a potential scam.
- Be wary of companies that have copy-cat names – some lenders name their company so that it sounds like a well-known or respected lender are often trying to trick people who don’t recognize the difference.
- Research the company to find out if they are a legitimate operation or have a history of fraud. You can search for them on Google (type in the company name and the word “scam”) or call the Better Business Bureau.
- Choose a lender that you can visit at their offices rather than an online or over-the-phone vendor.
Even if you need money quickly, it’s very important to take the steps above to make sure you aren’t being ripped off. It’s especially common for these fraudulent lenders to prey upon people who need money quickly due to an emergency or some other circumstance, but failing to check up on the company’s reputation could have a long-lasting negative impact on your finances.
Remember that, while there are some legitimate companies offering loans to individuals with bad credit, many of the lenders claiming to do this may be scam artists. Protect yourself from falling victim to loan fraud by using the tips above. If you do think that a company or individual is committing loan fraud, report it to the Federal Trade Commission.
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