You’ll find articles about unsecured payday loans everywhere on the Internet. You always hear about how these loans put consumers and borrowers at great risk. Truth is, high interest are not new. They have been around for ages. There might be some difference here and there, but the basic concept remains the same. This article from Bloomberg Businessweek explains why student loans (most of which is unsecured) has such high interest rates. If the lender is taking extreme risks to provide funds, the interest rates will be high as well.
Jeannie has a problem with this setup. Let’s listen to her story:
“I’ve tried hiding this fact from my friends because I’m really embarrassed that my credit rating is so low! I’ve tried my best to consolidate my credit card debt, remortgage my home, and pay what I need to pay on time. Obviously, this leaves me very little room to play with. Unless I win the lottery, I can’t see myself out of this situation for the next five years. I know they say it takes a long time to rebuild my credit score but sometimes I really need to take out a loan for a very valid reason. Like when the heavy snowfall caused my garage roof to cave in. The problem is, I really don’t want to use any of the properties I have as collateral. I’ve already compromised my situation too much! I’ve heard about unsecured loans for people with bad credit. Are these the type of loans I’m looking for?”
The answer is yes, Jeannie, but you need to be aware of some issues surrounding unsecured online loans before you even think of applying for one.
Unsecured loans were very difficult to obtain, even for people with credit. Unsecured loans were, in principle, based on good faith. There was always the chance that the lenders wouldn’t get their money back from such loans. However some companies have done the math and figured out a way to hedge for this risk. One of the ways they did this is by pegging extremely high interest rates. In the law of averages, they figured they will come out on the winning side after subtracting bad loans from the good. The downside was these high interest rates resulted in fewer applications for unsecured loans for people with bad credit.
Now, certain companies are offering unsecured loans for people with bad credit with interest rates kept to the minimum level possible. They offer these to customers without the need for personal properties as collateral or any security deposits.
These unsecured loans for people with bad credit provided by online lenders have advantages that a local brick and mortar lenders cannot offer, primarily in the speed with which applications are completed and processed. These companies have developed lower interest rates programs specifically tailored for individuals who don’t have a good credit score.
These companies have made the service of providing unsecured loans for people with bad credit available because they know that this sector was disadvantaged by the recent economic downturn (they are popular even in the UK and Canada). Unsecured loans might be the way for them to rebuild their credit rating and finally escape the vicious cycle of debt.
Many of the current problems with unsecured loans are connected to student loans. The article “Student Loans: Grief and Relief” contains a wealth of useful links to resources on the topic.
To avoid suffering the same fate as Jeannie, do your best to keep your credit rating healthy. Keep a close eye on it, and check it regularly because you might think you still have a good credit rating and can get unsecured loans more easily when in fact you’ve fallen behind.
It is very difficult for a consumer to know in advance whether they have a high enough credit score to be accepted for a loan with a particular lender. This is due to the complexity and structure of credit scoring, which differs from one lender to another. Lenders do not have to reveal their credit score, nor reveal the minimum credit score required for the applicant to be accepted. It is impossible for the consumer to know in advance if they will pass a lender’s credit scoring requirements.
Read FICO’s primer on credit scores to be aware of the factors involved in the calculation of your credit rating. Also ensure that you’re aware of your rights and what you need to do when you suspect you’ve been scammed by reading the resources available at the Consumer Financial Protection Bureau website.
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