About Bad Credit Loans

When times are tough, and credit scores are low, a bad credit loan can seem like an ideal opportunity. Although they have their advantages, borrowers of these loans will find it more to their benefit to educate themselves before signing on the dotted line. While some companies involved in subprime lending have a reputation of following through with their promise to help at-risk borrowers, others prey upon the borrower's past, causing more trouble than the loan was worth in the long run.

Identification

Bad credit loans are specifically designed to target those individuals with less than perfect credit. The criteria of a bad credit loan varies depending on credit history and the amount of credit requested. Interest rates on bad credit loans tend to be higher than that of traditional loans offered to those with positive credit scores. The payback conditions may differ as well, consisting of weekly or biweekly payments, as opposed to once a month.

Types

Bad credit loans usually fall into two categories, secured and unsecured. In most cases lenders that service bad credit loans will seek collateral to offset the possibility of the loan not being repaid. This is a secured loan. And although the interest rates are higher than average, they are less than an unsecured loan. Bad credit loans can be secured by allowing the lender to place a lien on your home, although this type of scenario can be quite risky in cases of job loss or other unexpected circumstances. Unsecured loans require no equity but usually involve character references, detailed contact information, high fees and escalated interest rates.

Benefits

For those faced with extenuating circumstances that involve an urgent need for cash, bad credit loans can be beneficial, especially, if the borrower's goal is to improve his credit score. At-risk borrowers who are looking to get their credit back on track and are in need of cash can sometimes have a hard time finding a lender that will trust their willingness to pay, based on their past history. In this case, a bad credit loan can fit the bill, and if repaid according to the details set forth in the contract, can be effective in raising credit scores.

Misconceptions

Bad credit loans are commonly viewed as pitfalls with potentially damaging, long-term effects and predatory in their terms and conditions. This is not completely true. While it is a fact that bad credit loans and other subprime lending practices can lead the borrower down a path of financial crisis, if used wisely these loans can help a borrower update her credit history in a positive way. Bad credit loans that are taken out and repaid quickly, in full, can help to improve credit scores and prove the borrower more worthy in the eyes of other lenders.

Warning

Avoid companies that make promises that seem too good to be true. Companies that employ predatory lending tactics can make a financial crisis even worse. These lenders prey upon individuals in need of a loan, with promises of very low interest rates and fast cash. In most cases, these lenders charge astronomical application fees and rarely end up qualifying the applicant for the intended loan. The lender makes money on the fee, and the applicant loses all together.