If you have had a history of not paying your bills or loan installments on time, or if you tend to default regularly on your payment dues, then you would have a bad credit score. This means that it would be challenging for you to get a new credit card or a new loan to meet any financial requirements. However, the option which is readily available is personal loans for bad credit, additional info.
Before you think of availing a personal loan, you need to understand what exactly it is and if it is beneficial for you. And before understanding a personal loan, it is necessary to understand the difference between a secured and an unsecured loan.
Secured and unsecured loans
A secured loan is a loan that is given by a lender by taking collateral from the borrower of equal or more value. An unsecured loan, on the other hand, is given to a borrower without taking any collateral and is usually given based on credit history, income level, bank account balance, profession, etc.
An unsecured loan can also be given to a person with bad credit, but the interest rate and the fee charged is much higher. Similarly, a secured loan can also be sometimes given to a person with bad credit by taking collateral of a value much higher than that of the loan disbursed.
What is a personal loan?
A personal loan is a type of unsecured loan that is given by a lender to a borrower for a fixed period and has to be paid back in fixed installments. The interest rate charged on the personal loans for bad credit or good credit remains the same during the tenure of the loan, but for bad credit, the interest rates are higher. This is because the lender needs to mitigate the extra risk that he is undertaking by lending to a borrower with bad credit.
People can feel the need to take a personal loan for many reasons, such as medical emergencies, unforeseen expenses, or special life occasions like marriage, holiday, or education fees. Sometimes, people also tend to take personal loans in order to pay back an existing loan taken from a bank or any other institution. This practice can be beneficial in the case when the interest rate on the personal loan is less than the interest rate on the erstwhile loan. However, from the perspective of maintaining excellent financial health, this is not accepted as a healthy practice, primarily because it can trap the borrower in an indefinite cycle of loans.
Pros and cons of personal loans
In addition to meeting short term cash requirements, the most significant advantage of personal loans for people with a good credit score is that the interest rate charged is lower than that on credit cards or payday loans. Thus, personal loans for good credit can help in paying back debt and reducing the number of loans. Moreover, the interest rate charged on a personal loan does not change with time and remains constant during the tenure of the loan. This is unlike a credit card, where the interest rate can be modified at any time by the issuing authority.
Personal loans for bad credit, on the other hand, may not be such a good idea. This is because the interest rate charged on them can be unusually high, and the borrower may also have a pay a high upfront fee to get the loan. Thus, it is very important for a buyer to clarify the costs associated with the loan beforehand with the lender. Also, personal loans can lead to a further deterioration in the credit score of a borrower because people with bad credit tend to default on payments. As a result, these borrowers further reduce their chances of getting a loan from any institution at a reasonable rate of interest and fee.
What is the alternative?
As an alternative to availing a personal loan, it is a wiser choice for a person to consider making regular savings over a period of time in order to accumulate a surplus that can be used to meet unforeseen or planned expenses. Simple changes in the lifestyle like reducing the monthly spending, shifting to a higher paying job, or delaying a luxury purchase can go a long way in maintaining good financial health. Loans and other cash advances should always be considered as a last resort.
