Kenneth asked us the following question:
“I don’t want to sound smug, but isn’t a debt trap caused by the borrower in the first place? Shouldn’t the borrower be responsible enough before taking out a loan even if it’s small? Just asking…” – Kenneth, Reno, NV
Well, Kenneth, it’s easy to blame borrowers. After all, they’re the ones who put themselves in that situation. But it’s not that simple. Borrowing is a difficult and emotional situation that puts the borrower at the mercy of anyone who can dangle money in front of him. It’s this dangling of money that many policymakers are blaming on lenders. In the old times it was called usury; today, it’s called abusive. Abusive lending practices include luring borrowers with loans that carry hidden fees or taking collateral that is way above the value of the loan. Mortgage News Daily lists some more of these prohibited lending practices including charging for unnecessary insurance in your loan. Of course, there are ethical lenders around including those that offer online loans for people with bad credit. The situation here is not much different in the UK and Canada.
In any case, borrowers can minimize being a “victim” to a debt trap by being a good borrower in the first place. Here are five ways to borrow responsibly.
Only take out a personal loan like online loans for people with bad credit during an emergency and not because you want to buy something. These loans charge a high interest rate and other fees. Often it’s better to wait for the next paycheck; but if the situation is urgent and it can’t wait, then these loans are useful.
Before applying for online loans for people with bad credit, make sure you have the best terms around. Loan sites that feature powerful search engine tools make it easy and fast today to find the best direct lender. All you need is to enter some personal, work and bank information and the loan you need, and these sites can give you the most appropriate lenders. Compare their interest, payment terms, penalty fees and other hidden fees.
Even if you can easily get an approval for online loans for people with bad credit, make sure to get just the amount you need. In a Consumer Financial Protection Bureau findings, borrowers of bigger payday loans were found to have taken around nine months to pay back the whole loan. That means they paid back the loan almost twice, if not more, than the principal.
Getting more than what you need means being charged with a high interest on the surplus amount. Again, these loans work best when the situation is urgent, and not when you just want to buy something.
This sounds obvious, but there are times when borrowers are faced with a decision to pay the loan first or buy something with a limited deal. Sometimes, borrowers will roll over the loan just to be able to use the payment for other non-urgent purchases. Don’t do this. Always pay on time to protect your credit score and from the risk of blowing up a small loan.
Generally, lenders are willing to talk about giving borrowers some leeway when paying for loans. In fact, the last thing they want is for borrowers to suddenly stay quiet about late payments. So talk to your lender and work out a strategy to pay back. Keep in mind that lenders want nothing more than you paying back their money, so they’ll help you in any way that you can pay back. Just make sure they don’t harass or intimidate you or force you to take a loan again. These practices are illegal and you can report them to the State General Attorney or Department of Financial Institutions, which regulates this industry.
By being a good borrower, you’re less likely to fall into a debt trap. Even better, you’re setting yourself up for a better credit score soon enough.
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