Most South African’s would love to have a savings account for when they have an emergency and they need cash in a hurry, unfortunately for many people having some form of savings account is out of the question and the money that they have had to be stretched to just make it through the month.
If your salary is already stretched to its limits and you have an emergency expense to pay for, this can be very stressful and cause you to make silly decisions regarding your finances.
If you have already taken out personal loans and you are struggling to make the payments on them this will negatively impact your credit score, making it even more difficult for you to apply for a loan in the future.
If you have a bad credit score and you need money in a hurry and have been turned down by all the traditional banks where can you turn and what can you do?
Bad credit loans
This is where bad credit loans come in, these types of loans are especially for people that have a bad credit score and have no other options when it comes to borrowing money. The lender will charge a much higher interest rate because you are seen as a high-risk client.
A bad credit score is from a history of paying accounts and bills late or not at all. This shows the lender that you might not pay back the loan amount on time or even at all. The lender realizes that you need the money and so to protect themselves from your nonpayment, they compensate themselves by charging a higher interest rate. This higher interest rate means that they make more money from granting risky clients' loans and offsets the clients that default on their loans completely. If 100 loans are granted, but 20 of those loans are not paid back, the lender will need to make up the money on the other 80 loans to cover the loss on the 20 that were not paid. This means that you will be charged a higher interest rate because you are seen as a higher risk client.
There are two main types of personal bad credit loans - secured and unsecured.
Unsecured personal bad credit loans
This type of personal bad credit loan is granted when the client signs a contract and agrees to pay back the loan according to the loan term agreement.
There is no need for the client to provide collateral against the loan, these types of short-term loans are easy to obtain, but the interest rate is a lot higher and if you default on your loan the lender may hand the debt over to a collection agency and charge late fees and penalties. This will adversely affect your credit score and make it even more difficult for you to obtain credit in the future.
A secured personal bad credit loan
A secured personal bad credit loan requires the client to use a valuable item that they own as collateral against the loan amount. This can range from a piece of jewellery, their car or their equity in their home loan. If you default on the loan the lender will claim the item listed as collateral to make up the money that you owe them for the loan.
This makes these types of loans very risky as the item that you list can be lost putting you in an even worse situation than you were before.
Another type of secured loan is a payday loan, although you aren’t putting up collateral as such you are still securing the loan by promising to pay it back on your next payday. Payday loans are unsecured and people who have bad credit but are earning a stable income can easily qualify.
The lender will ensure that you are permanently employed and able to stick to this commitment. The lender will charge a much higher interest rate in case you default on the loan and monitor your account to ensure that they recover the money that is owed to them. If you default on this type of loan the lender will contact a collection agency and this will decrease your credit score even more.
There are a variety of lenders that promise personal bad credit loans when you need them most but you should always make sure that you know exactly what you are agreeing to. It can be very tempting to agree to any terms and conditions when you need the cash in a hurry and you might not notice the fine print which could push you further into debt. You need to make sure that you will be able to pay back the loan easily and won’t need to take out another loan to pay for the next one, trapping you in a debt cycle.
Knowing your credit score before applying for a loan will help you determine which type of loan will suit your needs.
Advantages of a Personal bad credit loan
If your credit score is very bad, then taking out a personal bad credit loan can be very beneficial to you, once you are granted the loan and pay it back on time this will positively increase your credit score and make you a lower risk client in the future. These types of loans don’t require you to disclose all your financial information and usually only ask for proof of employment and basic personal information documents.
To apply for these types of typically online loans is easy and can be done online with very little effort, the lender will not charge you an application fee making it free to see if you qualify or not.
Benefits of bad credit loans include:
- Improve your credit score by paying on time
- Become a lower risk client
- Apply easily online
- No application fee
As the economic conditions become worse more and more people are finding themselves in financial difficulty and needing to rely on quick loans to make it from month to month because there is such a high need for loan services there is an increasing number of loan providers.
This can lead to confusion on whom to choose when applying for a loan, you need to ensure that the lender is registered with the NCA National credit act and comply with all their rules and regulations. Make sure that you read the contract carefully and plan for any initiation fees or extra charges, that these charges into consideration when you are comparing the different loan products to make an informed decision.
Bad credit loans can be a quick fix to your financial problems, but should only be taken out if you are sure that you will be able to pay back the loan. If you are unable to pay back the loan you will only push yourself into worse debt. If your cannot keep up with your debt repayments then a bad credit loan will make your situation worse - rather consider a debt consolidation loan which will make it easier for you to manage your debt.
If you need a second change at financial freedom, then a personal bad credit loan could be the solution that you are looking for. If used correctly, you can use the loan to increase your credit score as well as let you borrow more money in the future when you need it.
With some careful financial planning you can take back control over your finances and if all goes well, start a savings account for the future.