How Bad Credit Loans Differ From Traditional Loans

Often, bad credit loans are seen as being a different entity when compared to traditional forms of financing. While certain aspects of the loan process are the same, there can be key differences between products advertised as being for those with poor credit than options from traditional lenders. To help you see how these two loan types differ, here are some tips to get you started.

In the end, the cost of borrowing will be significantly higher than that of general loan. Regardless of how or why you have poor credit, those who want to borrow need to understand that they are considered a higher risk borrower and will have to pay a premium to borrow. Below are some of the main elements of a loan that changes if you have bad credit.

 
Interest Rates
The biggest difference between bad credit loans and offerings from traditional lenders is the associated interest rate. When banks consider loaning funds, the interest rate serves as a reflection of the amount of risk they feel they are taking on. And the more risk they see, the higher the rate charged.

Individuals with bad credit are by default considered a higher risk than a person with good credit, even if the other factors involved, like monthly income, are the same. That means, if you need to find a loan and have some blemishes on your credit report, you will pay more than someone with a cleaner lending history.

However, it is also important to note that there is no required interest rate that all lenders must charge. This means, if you shop around for a loan, you may find options with lower interest rates than those offered by some of their competitors. And, since the interest rate is so vital to determining your overall cost, it is worth looking around for the best deals possible before applying for a loan.

Overall options may be limited and considering non-profit and government sponsored finance may be a good option – learn about low cost loans and advances for bad credit borrowers.

Collateral
A person with bad credit may be required to offer up something as collateral to support the loan. Collateral is something of value that the borrower both owns and is willing to pledge to make the loan less risky to the lender. Sometimes, collateral can be used to help lower an interest rate even if it isn’t inherently required. At other times, a lender will insist there be collateral before they approve the loan.

Typical collateral includes vehicles, such as cars or boats, as well as real estates, such as a house or land. In some cases, other valuables like jewelry or collectibles, or the balance of a cash account may also be considered.

Whether a business will accept a particular item as collateral is at their own discretion. If you have a particular item in mind, and it isn’t as common an offering as a vehicle or real estate, then it may be wise to discuss the possibility of using the asset as collateral before applying for the loan.

 
Repayment Terms
Another point where some bad credit lenders may insist upon is the use of direct debit for repayment. This involves providing information regarding a bank account and agreeing to the monthly payment be automatically debited on the due date.

Having the payment directly debited also provides an additional level of security to the lender, so it makes the situation feel less risky overall.

Traditional lenders also allow borrowers to use direct debits for their payments, but they might not insist on it as a condition of approving the loan.

It is important to understand that every lender may handle certain aspects of their terms differently. This makes it crucial that you dedicate the time to read through the agreement before going forward with the loan. Ultimately, the agreement is a legally binding document and failing to meet the terms will have consequences. When in doubt, it is better to choose not to accept the funds than enter into an agreement with which you are not comfortable.