Installment loans for bad credit are widely regarded as a direct and efficient solution for temporary financial difficulties. A great many specialized financial and loan firms across the US offer “easy & cheap” credit to clients who cannot obtain financing elsewhere due to other poorly performing (past or present) loans. Getting these loans from direct lenders is relatively easy, and can even be done directly online in some cases.
In this article, we will take a closer look at the so-called “installment loans for bad credit” and pinpoint what they are, exactly. Then, we will compare them with other types of credit and we will list some associated advantages and drawbacks. Finally, we will consider the long-term effects of installment loans on overall client wealth and quality of life.
What Are Installment Loans for Bad Credit?
An installment loan is a type of loan which is paid back in a number of scheduled installments, over time. To be considered an installment loan, the loan should have at least 2 (two) installments. Installment loans can extend over several months, or even years, depending on the size of the loan and the conditions the parties agreed upon. Payment usually occurs on a monthly basis. A mortgage, for instance, is a type of installment loan. Every installment is not just a fraction of the borrowed sum but also contains interest, the specifics of which are detailed in your Loan Agreement.
Installment loans for bad credit are installment loans offered to people with bad credit history. If you have a bad credit history, it means that at some point you failed to pay your loans on time or you defaulted on your debt. Your credit history will determine your credit score, and a poor credit score will most likely get you rejected by top banks and lenders if you’re looking to get a new loan.
Who offers them?
This is where another breed of direct lenders steps in, offering installment loans for bad credit to people with poor or no credit history. Apparently, installment loans for bad credit would seem as a rational and common sense solution for people in need of quick cash but without normal access to the standard lending market and, consequently, a highly reputable bank.
However, bad credit history will not go unnoticed by anyone, despite the enticing ads and extensive arguments sales agents will put forward. The main difference between normal installment loans and installment loans for bad credit is the interest rate, usually higher for the latter category. In addition, there are no guaranteed installment loans for bad credit, and you will have to undergo some type of review before getting approval.
In addition, installment loans with no credit check or with very easy approval are rare, and you will have to demonstrate at least a minimal payment capacity before getting the money.
Nevertheless, the benefits of installment loans for bad credit are apparent when compared to a much worse method of borrowing money: payday loans.
Installment Loans vs. Payday Loans – What’s the Difference?
A payday loan is basically a short-term unsecured loan you take out and then must repay in full, in a single installment, at an established payment term. While installment loans for bad credit are paid back at fixed, scheduled, intervals, payday loans must be paid back in full all at once, plus interest. The interest rates for payday loans are very large and hover just below the upper limit permitted by law.
Payday loans have even been declared illegal in some countries due to the abusive practices associated with this type of lending. Moreover, Google has also banned any ads for payday loans and loans with an exaggerated interest rate.
In this context, it would seem that installment loans for bad credit can be characterized as relatively benign, promising easy credit with relatively low interest rates. But are they really that good at helping you out of a tight financial spot?
The Cycle of Credit – How can Installment Loans Help
Despite a natural dose of skepticism, we are forced to admit that installment loans for bad credit can be very helpful for some people in some situations. Though they can hardly be described as the best money-borrowing solution, they can markedly improve your personal finances if you manage your money wisely and avoid falling for the usual tricks lenders pull off. So, here are some major advantages of installment loans for bad credit:
- They are a relatively safe money source. Most lenders operating in this area are legit, state-accredited and observant of state and federal regulations. Nevertheless, make sure you thoroughly research your lender before signing anything.
- Paying once a month is much better than paying it all at once. Installment loans for people with bad credit are usually structured in such a way so as to permit the debtor to make regular and timely payments. Whether long-term or short-term, payment is possible if money is wisely managed.
- Paying on time will improve your credit score. If you manage to pay your installments on time, or in advance, your overall credit score will increase. In the future, this can give you access to safer and lower-interest credit from other financial institutions.
- It can really help you out of a tight spot. If you’ve got a poor credit score, getting an installment loan for bad credit can be your only solution if you need emergency funds fast.
The Hidden Dangers of Installment Loans for Bad Credit
Despite some obvious advantages, installment loans for bad credit are a little different from the normal credit you would get from a big bank. Here are some disadvantages and dangers that can lurk behind an apparently enticing credit offer.
- They can have ridiculously high rates. Most people don’t borrow a lot, with the average small loan in our case being at around $1000. However, the rates can end up making you pay much more than what you initially borrowed. In one case, one person reported taking out a $2500 loan for house repairs and ended up paying back more than $3000, a very large and unjustified markup.
- Lenders take advantage of your poor financial situation in order to keep you renewing. Sales agents are trained to make people renew their loans as many times as possible. In this way, people will simply keep on paying interest without actually getting any closer to paying off the main debt. In the end, some people end up paying more interest that the actual loan, which is simply ludicrous.
- They have hidden fees and add-ons and might not be secured. These extra fees are usually optional, but sales agents are explicitly instructed not to mention this. If you’re not careful, you may end up paying tons of money on extra fees and insurances, which defeats the purpose of getting the loan in the first place. To avoid all the hassle, read the Loan Agreement very carefully before making any deal with lending companies.
- The only goal lenders have is to keep you paying interest for as long as possible because it’s the way they make money. Don’t be fooled by the emotional messages preaching how much lenders want to help you solve your financial issues. What they actually want is you paying interest, the more the better, this being their real raison d’être.
- If your income is not sufficient, you risk spiraling into unsustainable debt and personal bankruptcy. Getting a loan will increase your present funds at the expense of future funds. If you don’t use the temporary financial gain to invest and become more productive, your money will eventually run out and you’ll be forced to make another loan to finance the initial loan. This can lead to a personal financial disaster and should be avoided at all cost.
Installment loans for bad credit can play a small but significant role in powering up the economy, by encouraging consumption and short-term investment in some customers. However, this strictly depends on the industriousness of the debtor and his ability to use the money productively and sustainably.
Unfortunately, most installment loans for bad credit are handed out to people without the means of using money in this fashion. The main consequence of this is a steady drain of wealth from already not-so-well-off segments of the population towards the richer segments of the population, which is wrong in so many ways. Overall, the main social effect of these loans is the long-term impoverishment of debtors.
In this context, make sure that you really need an installment loan and that you take all necessary precautions to avoid sliding into an abyss of debt.