Bad Credit Unsecured Loans
Bad credit unsecured loans are designed for people with bad credit and no collateral, so people that have been denied loans can get the money they need.
No Collateral Necessary for Bad Credit Unsecured Loans
Collateral is something of value that the lender can use to ensure you will repay a loan — that is, if it’s a secured loan. Lenders are more confident that a borrower will repay a secured loan, because if the borrower doesn’t repay the loan, the lender can seize the collateral.
For example, a car loan is a secured loan, and if a borrower defaults on the car loan, the lender can repossess the car (which, in this case, is the collateral).
Bad credit unsecured loans are unsecured, so they don’t require collateral. Of course, lenders feel unsecured loans are riskier, since borrowers may not repay debt that isn’t attached to collateral. Lenders make up for this risk by charging higher interest rates for unsecured loans.
Unsecured Loans for Bad Credit Borrowers
Bad credit is determined by an individual’s credit report, which provides lenders with a person’s financial information, including payment history and amount of debt owed. Bad credit can result from late payments, too much debt, or other factors.
Bad credit suggests that an individual either does not know how to manage his or her finances or is irresponsible with his or her finances. Oftentimes lenders deny loans to borrowers with bad credit, because they are afraid such borrowers will not repay the loans.
Some lenders, however, understand that credit is not taught in school, so many borrowers are not aware of how their credit habits impact their credit until after the damage is done. Lenders also recognize that an entire market of bad credit borrowers is being overlooked.
In order to harvest potential profits from this untapped market, lenders have become more lenient with whom they are willing to lend money to. Providing poor credit unsecured loans to people with bad credit is still risky, though, so lenders charge high interest rates to cover their losses.
Higher Interest Rates for Bad Credit Unsecured Loans
Since obtaining an unsecured loan with bad credit will likely result in higher interest rates, it’s important to recognize how interest rates can affect the cost of the bad credit unsecured loan.
The best way to understand how interest rates can impact the cost of a poor credit unsecured loan is by comparing similar loans with different interest rates. Below are several loans with the same initial loan amount and the same term (the length of time until the loan comes due). The only difference is the annual percentage rate (APR).
APR is the interest rate that is charged for the entire year of the loan and is used to compare loan costs. Calculate the monthly interest charge by multiplying the APR by the loan balance (the amount still owed on the loan) and divide by 12.
|Loan Term||36 months||36 months||36 months||36 months||36 months|
|Overall Interest Charged||$790||$1616||$2480||$3379||$4314|
|Total Amount Paid||$10,790||11,616||12,480||13,379||14,314|
Notice how an increase in the interest rate can increase the monthly payment and the overall interest paid.
In this case, a 20% interest rate increases the monthly payment by almost $100, and increases the overall interest charged by $3500. Even a 5% increase in the interest rate can hike up your monthly payment by about $25.
Loan Balance Also Impacts Loan Costs
Understanding how the loan balance can affect bad credit unsecured loan costs can help borrowers determine how much money they want to borrow.
In order to demonstrate how the loan balance can impact the cost of a poor credit unsecured loan, the table below presents loans with the same APR and loan term, but different loan balances.
|Loan Term||60 months||60 months||60 months||60 months||60 months|
|Overall Interest Charged||$1374||$2748||$5496||$13,741||$27,482|
|Total Loan Amount Paid||$6374||$12,748||$25,496||$63,741||$127,482|
As you can see, a higher loan balance results in larger loan payments and greater loan costs. This is because the interest charge is calculated by multiplying the APR by the loan balance. The higher the loan balance, the larger the interest rate charge and the monthly payment.
Recognizing that a higher loan balance can result in a larger interest rate charge may encourage individuals to pay down debts more quickly. If borrowers only make the minimum payments on their debts, they will be paying much more in interest in the long run than individuals that make larger monthly payments.
Loan Terms Affect Bad Credit Unsecured Loans, Too
The same point can be made for loan terms. A longer loan term can be fantastic - it gives you more time to repay your loan, which means your monthly payments will be smaller. It also means the lender can charge you interest for a longer period of time, so you’ll pay out more in interest for a long-term loan.
|Loan Term||12 months||24 months||36 months||60 months||360 months|
|Overall Interest Charged||$550||$1075||$1616||$2748||$21,593|
|Total Loan Amount Paid||$10,550||$11,075||$11,616||$12,748||$31,593|
When determining a loan term you should choose one that is appropriate for the amount of money you are borrowing and for what you are capable of repaying. The table above shows that a 1 year term for a $10,000 loan will result in extremely high monthly payments, which may not be reasonable for most individuals.
On the other hand, taking 30 years to repay a $10,000 loan will cost $21,593 in interest charges. You would end up paying 2 times the amount initially borrowed in interest charges alone. In this circumstance, it would not be advised to borrow for such a long period of time.
Are Bad Credit Unsecured Loans Worth It?
Sometimes it can be worth paying extra, like getting braces for your child right away. If you get a loan so your child has braces, you are taking care of an important need that should be addressed sooner than later.
Other times, however, it may be more worthwhile to wait and improve your credit or save money instead. For example, if you want to purchase a flat screen TV, it may be best to wait. Not only is this purchase unnecessary, but it is also a costly option. Taking out a poor credit unsecured loan to cover the cost of a flat screen TV will cost you more than the going rate for a flatscreen, not only because you pay for the additional cost of interest rates charges, but also because a TV depreciates (loses its value) quickly.
Do your homework and determine if you really need a bad credit unsecured loan. If you do, decide how much would be a reasonable amount to borrow and how you plan on repaying the loan. If you decide not to take out a bad credit unsecured personal loan, take this time to improve your credit and save for necessary purchases in the future.