Taking out a loan is a big decision to make, especially if you already have existing debts or a low income. So it’s really important that you choose a loan wisely. However, choosing a loan can also be a minefield if you suffer from a poor credit record. Your choices will be narrower still, due to most lenders being reluctant to lend to subprime borrowers since the credit crisis.
However, bad credit loans are available, and applying for a short term unsecured loan when you have a poor credit history shouldn’t be too difficult – but the catch is that you have to be willing to pay higher APR rates. This is how some people get into worsening debt. So it’s more important than ever to know what you’re signing up for, and some of the catches to look out for.
Understanding APR Rates
The first thing to look for is the affordability of a loan. If you have bad credit, then a loan is going to be more expensive, but it’s still important to shop around. By law, lenders have to advertise an APR rate to show the cost of the loan. This figure should include all normal fees for supplying the loan, such as administrative costs, as well as the interest rate on the loan. However, it’s important to remember that it is a ‘representative figure.’ This means that it is not necessarily the rate you will be offered for the loan you apply for. Lenders only have to award that rate to 51% of their customers, so the rate you get could well be different.
It also makes sense to bear in mind that the APR figure is calculated for a whole year. So a £150 loan for two weeks, even from a payday loan provider charging 4,214% APR, would cost you £27.25 – so you’d pay 18% interest. That is a lower rate of interest than most unauthorised overdrafts. So although it’s not ideal to take out loans at such high rates, as a short term loan, it isn’t quite as exorbitant.
TAR (Total Amount Repayable)
A far better way to work out the cost of a loan is to ask the lender for the Total Amount Repayable. This figure would normally include the entire interest payable throughout the life of the loan, and the fees and charges payable.
Hidden Fees and Charges
Unfortunately, some lenders hide their fees and charges from the unwary customer. You need to know exactly when you will be charged, and how much if you default. This will increase the cost of the loan, and in some cases, the money may be taken straight from your bank account, so you could also be hit with bank charges.
Early Repayment Terms
If possible, choose a lender who will let you repay the debt before the end of the loan term without charging a penalty. This will enable you to save money.