There are a number of differences between bad credit loans with guaranteed approval and regular loans, as well as many misconceptions about these differences. It is important to understand the differences in order to make an informed choice when opting to take out a loan.
1. Credit Score
A bank or other financial institution will run a credit check before approving a loan. With a regular loan, your credit score plays a major role in whether the loan will be approved or not and may also be an evaluating factor in the loan amount that will be awarded to you.
Your credit score will not affect whether a bad credit loan will be approved or not. However, with some credit providers, it may affect the loan amount, interest rate or other charges that may be associated with a loan. This means that a bad credit loan provider will still run a credit check.
It is also important to understand that bad credit is not the same as being black-listed. If you are black-listed, you may not be approved for a bad credit loan.
2. Interest Rate
Bad credit loan providers charge higher interest rates than regular loan providers. This is because they carry a much greater risk in providing a loan than regular providers. If a person has failed to make regular payments, on time or defaulted on a loan in the past, they are more likely to do so in the future and are therefore a greater risk.
It is advisable to first apply for a regular loan even if you have a bad credit rating to avoid the higher interest. If this is not an option, then compare rates between different bad credit loan providers. You may still be paying a higher interest rate than for a regular loan, but you can minimize the cost in the long run.
Also, be aware of additional admin fees, service fees or other charges. These are notoriously added onto bad credit loans and could make the repayments unaffordable. Also, you may be required to pay these fees and charges upfront in order for the loan amount to be approved.
3. Terms and Conditions
The term of a loan is how long it will take for the loan to be repaid in full, including interest and other charges. With bad credit loans, the term is normally relatively short when compared to other types of finance such as a mortgage, car loan or even student loan. It is however essential to opt for as short a period as is affordable in order to repay the loan as quickly as possible and avoid additional interest. Regular loan providers are often not flexible and offer standard terms that cannot be changed or adjusted to suit individual needs.
The amount of a bad credit loan is also normally small and is not really designed to purchase large assets or expensive items such as property or a new car. However, in most cases, these loans operate in a similar way to a personal loan in that no reason for the loan will need to be stated. Due to the smaller principle loan amount, these loans are suitable for emergencies or purchases that you cannot afford immediately.
Bad credit loans are designed for individuals who cannot access finance through regular channels. These types of loans can also act to repair a bad credit rating if they are used correctly. For example, it can be used to consolidate debt in order to repay it faster and more conveniently. If the repayments are made on time and in full on the due dates, it will reflect positively on your credit score.