Having a good credit score is an essential step to managing your finances since it can affect interest rates for loans and credits, employment, utility expenses, and other things. The FICO score model defines a good credit score to be between 670 to 739 while the VantageScore model defines it to be between 661 to 780. Achieving good credit can be challenging in itself, but maintaining it is just as important as it is an indicator of your financial responsibility.
Bad credit can be restrictive and limiting in many ways. A low score can make it harder to secure loans or home rental options, spike up insurance costs and interest rates, and require a deposit for utilities. Lenders will generally be more apprehensive about loaning you money if you have a low credit score, but there are a few options you can explore if you need financing.
Payday Loans
Payday loans are unsecured short-term, high-interest loans that give you cash to cover you until your next paycheck. It is also called a cash advance loan since it essentially gives you a small cash advance that you repay once you get your paycheck. Non-bank companies target people who are unable to make ends meet each month and need help covering living expenses.
Many payday lenders do not check your credit score or assess your ability to repay the loan, making it a common option for those with bad credit. However, the drawback would be high-interest rates and short repayment periods, which can make you spend more in the long run. While you can only usually loan small amounts, the interest rates can get significantly high, making payday loans one of the most expensive loans that you can get.
Getting loans can be more difficult when you have a low credit score, but installment loans for bad credit can be an affordable option.
Installment Loans
Installment loans are another financing option for bad credit users and are known to have better terms than payday options. As the name suggests, installment loans allow you to borrow a specific amount of money to be repaid in fixed installments. Some lenders offer installment loans for bad credit, which cater specifically to people with low credit scores, imperfect credit, or no credit history.
Installment loans for bad credit are similar to regular installment loans, which consist of a specific loan amount, fixed repayment schedule, and fixed or variable interest rates. However, since there is an additional risk for lenders, you can expect higher interest rates and additional or higher fees if you have bad credit.
Bad credit installment loans may also come with higher interest and fees but still differ from payday loans. First, you have a higher loan amount limit since you are repaying through a fixed schedule and not through a lump sum. Second, your repayment history will more likely be reported to credit bureaus, so you can slowly rebuild your credit. Payday lenders do not usually do this, so your credit will remain the same. Third, bad credit installment loans will have an average APR of 36%, whereas payday loans can have an APR reaching 400%. Thus, you will spend a significant amount of money with the latter.
