Loans with bad credit, are they worth it?

“Locked into a contract before you realise the actual expenses you will face.”
If you google “loans with bad credit” or “bad credit loans” you will see many ads and website links informing you of their quick, fast applications and same day payment processes. “Approval in under 60 seconds!” Processing times is a common theme when you compare bad credit loans. Promises of speed and convenience everywhere you look, it has to be too good to be true. Well although these promises do hold, the pros of getting one of these bad credit loans are not worth the consequences that come along with them.

High Risk Comes High Fees

Having a low credit score or being considered to have bad credit, means lenders will be less inclined to lend to you as they believe there is a higher chance that your loan payments will default. Defaulting on a loan can be damaging to your financial situation and potentially put you into a vicious debt cycle, this is why many lenders will decline applicants who do not meet a credit score threshold.
  • A Low credit score means a high risk of loan defaults.
  • Loan defaults can be further damaging to your credit score and finances.
Those lenders that do offer bad credit loans make the process quick and easy so they can get you locked into a contract before you realise the actual expenses you will face.

A Plaster Over a Scar

The reason these bad credit loans pop up with keywords such as “easy” and “fast” is because they are offering a quick fix answer that doesn’t give you the solution to your problem. They offer only short term remedies that help you get by until next week or next month, well that’s what they make you think. You will have to pay back what you borrowed plus all the extra expenses that come with a bad credit loan.
  • Daily compounded interest
  • Establishment Fees
  • Debit/Payment Fees
And failing to meet a payment, means you have additional charges put on top that get compounded too.
  • Default Fees
  • Direct Debit Cancellation Fees
  • Extension Fees
Using a bad credit loan as a quick fix plaster over the financial issue you are experiencing may make the situation worse. You haven’t given yourself the time to treat the root causes of your financial problem, and you may be leaving yourself open for further damages.

One Step Forward, Three Steps Back

After receiving your bad credit loan and finding out you are unable to manage the high repayment amounts, you may find yourself in a dangerous position.
  • Failing to pay for your loan has added additional fees to your loan balance.
  • The loan balance then has interest compounded further and increases more.
  • Repayment amounts become unmanageable, and you need to go elsewhere for more financial assistance.

So What Should You Do?

This debt cycle can spiral out of control very quickly due to the short terms involved with bad credit loans. Having little to no security offered, as well as already being in an unstable financial position could spell disaster for you and your finances. Look into your current financial situation and ask yourself if you are financially capable of taking on the responsibilities of getting a loan. We recommend going through the checklist we provide in our, ‘Am I ready to apply for a loan’ blog. If you are aware that you have bad credit, then you need to find ways to rebuild your credit rating. Read one of our credit building blogs here to find out ways how. You should refrain from borrowing money and instead find ways to manage your money better so that you don’t end up in the same situation. However, if you desperately need emergency cash and have no option. Contact Work and Income and see if you qualify for urgent or unexpected costs benefits.
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