Pros and Cons of Bad Credit Loans and Payday Loans

If you're considering a payday loan or bad credit loan to get you through a tight spot, it's imperative to find out exactly what interest rate you'll pay, and how it's compounded. Usually, the interest rate on bad credit and payday loans is 35 times that of a credit card loan and up to 80 times more than mortgage rates. In the U.S., payday loan companies might charge up to 574% interest annually.

In an emergency situation when you need funds quickly, bad credit or payday loans are usually the fastest way to get cash. While most banks can take as long as one to two weeks to place funds in your account, a payday or bad credit lender will usually deposit funds into your account the same day you apply.

Most bad credit and payday loans are short-term, and when you're dealing with sky-high interest rates, that leaves a large sum to be paid back to the lender in a short time. Many individuals who use these loans find themselves having to apply for another as soon as they've paid their lender back, as they've been forced to redirect funds that were meant for important expenses to cover the interest. Most borrowers in the U.S. spend five months of the year paying for their loans, and in the end, they've paid up to $800 for a $300 loan.

If you really need cash and can't get approved by a traditional bank, applying for a bad credit or payday loan may be the only option. Most bad credit lenders approve between 80% and 95% of applications and credit history doesn't play much of a role in the approval process.

Plenty of shady lenders use the promise of bad credit loans to prey on people at their most vulnerable. Scammers may use the borrower's applications to steal identity or credit card information without actually lending money, or they may continue to withdraw payments from the borrowers account even after the loan is paid back, in hopes that the borrower won't notice. It's important when applying for a bad credit or payday loan that you do your research on the company and check their business business bureau rating.

Depending on the lender, repaying a bad credit or payday loan as agreed may help improve your credit score. Although some bad credit lenders don't report to credit bureaus, others offer loan arrangements designed specifically to improve your credit score and report to credit bureaus consistently. When applying, be sure to ask your lender if they'll be reporting your payments.

With payday loans, the time borrowers have to repay usually minimal. When applying for a payday loan, it's important to make sure you understand the amount you must pay the lender on your next payday. Then, ensure you'll have enough funds available to cover your regular expenses on top of the loan payment.

Some bad credit lenders allow you to use your loan to pay off other unsecured debt such as credit cards and lines of credit. This can help to drastically improve your credit rating and make it easier to pay off your debt by only making one payment each month as opposed to multiple payments on multiple accounts.

Whether you're borrowing from a bad credit lender or a payday loan company, you can assume they're not going to offer much flexibility. Your payment methods and withdrawal dates will be pretty set in stone. Typically, payments must be set up as automatic withdrawals; NSF payment results in multiple fees and penalties or even the cancellation of your loan agreement.

Depending on the lender, a bad credit loan sometimes offers a repayment term of one to five years. Borrowers must repay the loan in small installments while the lender reports their compliance to a credit bureau. Bad credit loans may offer extended repayment periods; it's important to remember that payday loans must be paid in full by the following payday, however.