Are Short Term Loans the Answer When You Have a Bad Credit Rating?
Even if you keep track of your finances, any kind of emergency can put you in difficulty. At that time, you might need to look at options that can get you out of the deep end. If your friends or family members aren't able to give you the funds, then you will probably look into loans.
When emergency situations arise, and your credit is not the best, then you might be looking at short term or payday loans. These are pretty easy to get for people that have bad credit, and many lenders approve them quickly.
But are short term loans the right choice even if you have a bad credit rating? No, short terms loans are not the best option. They can affect your credit score even more, and these loans can be very troublesome for you.
What Is A Short Term Loan?
A general long-term personal loan is where you can pay back the money easily over a few years. If your credit is good, then the lender can offer a very reasonable interest rate.
On the other hand, short-term personal loans are the ones where you have to pay the money back much sooner. While it can significantly vary with the type of loan, you generally have to pay it back within a year.
Most of the lenders that offer these loans don't require many documents, and they can quickly process your application. They simply need proof of income, some form of ID, and a credit statement. But they will still check your credit themselves.
Most people don't generally go to banks for either of these loans, they look at options that don't need a bank account.
Different Types of Short Term Loans
There are many short term loans, and they all have different terms and structures. But none of them are thought to be good options.
The most common kind is a payday loan. You probably have guessed what it is by reading the name. A payday loan is where the borrowers have to pay back the lenders from their next paychecks. That means you need to pay them back the day your next salary gets into your account. They only require proof of employment, and they generally have substantial interest rates.
Another popular one is the car title loan. This allows the borrowers to put down their car as collateral for the loan. But unlike most other loans, they only pay a fraction of the property's (a car in this case) estimated market value. That may help you understand that they are clearly taking advantage of your needs.
There are various other kinds of short-term loans as well, but none of them are good. If they are your only option, then you need to be very careful and accurately read the fine print of short term loans.
Why Do Short Term Loans Seem Attractive?
Many people criticise these loans and their lenders for taking advantage of borrowers. But the truth is, they seem quite attractive to many people in the UK and other countries.
The most obvious appeal to payday and other short term loans is that their lenders don't have strict requirements. They will give out loans to anyone as long as they can show some proof of income.
Another thing that attracts the masses is the convenience factor. Since the borrowers need the money as quickly as possible, these make a lot of sense. They can quickly contact a lender, apply for a loan, and have access to the funds in a matter of hours.
The fast process alone can attract many people even if they don't want it. But after the borrowers make a quick decision and get the short-term loans, they come to regret them later.
Downsides to Getting a Short Term Loan
The major downside to getting a short term loan is that the lenders want their money back quickly with interest. That means you need to have an excellent plan well in advance to pay back in time. Otherwise, you might go into an endless loop of short term loans or end up paying penalties.
These loans have an incredibly high interest rate. If you have bad credit, then they can go even higher on the rates. You could get stuck paying twice the amount or more.
As previously mentioned, these loans can also lower your credit score. If your score isn't high right now, imagine what could happen after it. Also, getting loans in the future will be much more challenging with an even lower score.
Better Alternative Options
If you are not able to get money from friends or family, then you can look into getting a guarantor loan.
Guarantor Loan
Guarantor loans offer you the chance to get the money you need quickly with a lower interest rate and much less fees than a short term loan.
Now you might be intrigued and wondering how do lenders offer low interest rates for people that have a bad credit score? They do it because the primary borrower co-signs the agreement with a guarantor.
A guarantor is a person that will co-sign your agreement, taking the responsibility of paying off the loan in case you are no able to do it. However, you need to make sure your guarantor's credit score is good or amazing. Also, the guarantor can't have any direct financial relations with you.
The better your guarantor's credit score is, the less interest you have to pay. This can make your life much more comfortable.
Finding the right guarantor can be quite a hurdle for someone that wants to have access to the funds in a short time. But the lowers interest rates make this option far better than a short term loan.
A guarantor loan can also allow you to pay off the debt slowly. Depending on your financial situation, you can choose a term of 12 to 72 months. The long term will enable you to conveniently make monthly payments at your convenience, which short-term loans don't offer.
