Bad Credit Loans

One of the main reasons why some people are unable to get loans today, is because they have a bad credit history. Once the banks or any other lender, finds out that a borrower has a bad credit standing, then they would be unwilling to lend the consumer any amount. The credit system was actually created for the purpose of helping out lenders and other financial institutions to screen potential borrowers.

Why Bad Credit Prevents People from Getting Loans

Credit history or credit report is the record of how well a consumer has handled his/her financial obligations. It is a record of how well a consumer has handled paying for loans and debts in the past. If there is a late payment or a default on a loan then it would show on that record.

When a consumers apply for a loan from a bank, for a credit card or for anything that would give them a credit, they are required to fill out forms where they would be required to provide their personal information. Those forms are then sent to a credit bureau. Credit bureaus are services that keep information on consumers and records of all their financial transactions. They would look at the information on the form and then try to find a match on their records. They would then forward the information to the bank, credit card company or store which sent them the request for the information on the consumer.

Whatever information is forwarded by the credit bureau is going to be used by the lender in deciding whether it is okay to lend money to the consumer or not. The records of the credit bureau will say whether a borrower has a good track record of paying debts and other financial obligation. If the records show that the particular borrower has many late payments, or has defaulted in loans before, then there is a lesser chance that they could get an approval for their loan application.

Some lenders would give bad credit loans to people but only with higher interests than the usual. Lenders see regular payments as the best indicator of a person with a good credit standing. They might not look at overpayments as a means for making up to missed payments for example.

How accurate is the information provided by credit bureaus? Some people are concerned that the information that is being provided might not be entirely accurate, but according to statistics only 2% of the records that have been disputed were corrected because it really contained errors.

Disputing Credit Reports

A consumer can dispute the information that might appear on his credit report. The credit bureau has 30 days within which it can verify whether the information is accurate or not. According to the credit bureaus, more than half of those disputes are resolved within 14 days. They also claim that more than 90 % of all consumers who dispute information on their credit report are satisfied with the result of the verification conducted by the bureaus.

Factors in Computing the Credit Score

The means of calculating the credit score varies from one country to another and is based on a certain model that they follow. In the United States and in Canada, the model followed is the FICO system of scoring. Here are the factors used in this system:

    • Payment history
    • Debt
    • Time in file
    • Account Diversity
    • Search for new credit

 

Payment History

This is the biggest factor that can affect the credit history of a consumer. It comprises 35% of the credit report. A negative record here can lower the credit score of an individual considerably. The bureaus would be looking for late payments, charge offs, debts that went into collections, foreclosures and other things that indicate that the consumers had some difficulty in making payments to what they owe in the past.

Debt

The type of debt that a consumer has would have an impact on the credit report of the consumer. This factor makes up 30% of the report. Debt is classified into three types.

Revolving Debt

Revolving debt mostly refers to your usage of your credit card. This is expressed in a percentage of the ratio of your usage of the card and your credit limit. The higher the percentage, the lower your score will be. Closing a credit card account while seeking to improve your credit score is not going to be a smart move since it will lower your credit limit and will result in increasing your percentage of usage.

Instalment Debt

This is the kind of debt where you are required to make fixed payments on certain dates. A good example of this type of debt is an auto loan. In an auto loan you are required to make a fixed payment for 24 or 36 months. When compared with revolving debt, this type of debt is not considered to be as important because it is usually secured, which means that a consumer will prioritize its payment.

Open Debt

This is the least common type of debt. In an open debt, the amount borrowed is to be paid in full for each month.

Time in File

This factor makes up 15% of the credit report. There are two components in determining the time in file. That is the age of the file and the average age of the accounts. The age of the file is determined by the oldest account in it, while the average age is determined by getting the average age of the credits on the file. All the accounts are to be counted even those that are closed.

Account Diversity

This factor makes up 10% of the total credit report. It would be beneficial to your standing if you have diverse types of accounts on your file. Lenders would see that as a good sign because you have the ability to manage different types of financial products.

Search for New Credit

You should be aware that inquiries into your credit standing makes up 10% of the scale used for your credit report. Some types of inquiries would be visible to lenders while others are not. A great number of inquiries would be seen as a sign that you are in constant financial difficulties because you need to get new loans.

Effects of Adverse Credit Reports

The information contained in the credit reports are made available by the credit bureaus to organizations and institutions that are lending to consumers. It is not the credit bureaus that determine whether a consumer is a high risk borrower or not. The bureaus only make the information available. The lenders have their own standards in determining who is worthy to give credit to and who is not.

An adverse credit standing could cause lessen the chances that a consumer can get favourable terms when it comes to a loan. In fact it could bar a consumer from getting a loan at all. There are loopholes in the system but right now it is the one being used by the lenders in determining who they will lend to.

Loans for People with Bad Credit

There are loans that are available for people with bad credit, but the terms under those loans are not so favourable. It is understandable considering that the lenders are taking a great deal of risk by lending money to people who have a bad history of handling debt. One type of debt that is available to consumers with bad credit are payday loans.

Payday Loans for Those with Bad Credit

Payday loans are short term loans that people with bad credit can use. The thing about this type of loan is that the lenders do not run a credit check at all. So it does not matter whether you have a bad credit or not. The lenders have their own qualities which they use in measuring whether lending money to a particular consumer is a good thing or not. You can only borrow limited amounts from payday lenders and the idea is to pay it back as soon as you get your next paycheck.

Sounds like a great idea? It really is a good thing on paper, until you learn how much the lenders will be charging for interest. Payday lenders normally charge 300%-400% APR. That can make it hard for a borrower to pay back the amount. But many borrowers prefer not to pay attention to the ridiculous interest in exchange for being able to borrow even though they have a very bad credit score.

Payday lending is causing a great deal of controversy, not just in the United States but in the U.K. and in other countries as well.

Dealing with Bad Credit

Bad credit might make it hard for you to get a loan, but that does not mean that you should resort to borrowing from lenders at high interests or to using payday loans. There are other ways that you can try in order to get the money that you need. You can try improving your credit report first for example before you try to borrow anything.

References:
http://en.wikipedia.org/wiki/Credit_history
http://www.theguardian.com/business/2012/mar/01/wonga-real-cost-payday-loan


Categories: Payday loans | Comments Off on Bad Credit Loans