Installment loans, such as personal loans, auto loans, or mortgages, provide funds with a predictable repayment schedule. But for consumers with bad credit, some payday and online lenders offer another type of installment loan that provides access to credit at a high cost.
Designed as an alternative to payday loans, these generally small, short-term installment loans come with a high annual percentage rate and are often marketed for emergencies or quick access to cash. Here is what you need to know if you are considering one of these loans.
Alternative installment loans compared to regular personal loans
High cost bad credit installment loans are no different from standard personal loans in their basic mechanism – the loan proceeds are paid to you and you then pay the loan back according to the repayment schedule.
Where the two types of loans differ is in the approval requirements. To qualify for a regular personal loan from some lenders, you may need good or excellent credit. According to Experian, a good FICO credit score ranges from 670 to 739. A very good score is between 740 and 799, while a score of 800 or better is exceptional. Some lenders offer personal loans to borrowers within a fair credit range, but interest rates may be higher and approval is not guaranteed.
Meanwhile, alternative installment loans, designed for people with bad credit, may require a minimum score of 580 or less. And because “traditional credit scoring loses its predictive power at the level below 580,” the approval process may be different, says Jeff Zhou, co-founder and CEO of Fig Loans, which offers installment loans to borrowers. from Texas, Missouri and Illinois.
In this case, other financial factors may have more weight. “Bad loans usually require some sort of income verification, like pay stubs or even copies of your utility bills to show you’re used to making payments on time,” Zhou explains.
Pros and Cons of Alternative Installment Loans
While alternative installment loans give borrowers access to funds they might not otherwise be able to claim, there is one significant downside: cost. Zhou says alternative installment loans can have much higher APRs and fees than conventional personal loans. Additionally, an alternative installment loan may have a low cap on the amount you can borrow. Some high cost installment lenders have maximum loan amounts as low as $ 2,500. However, there are installment loans with higher loan limits.
Zhou also cautions that not all alternative installment loans can be used to create credit. Whether your loan activity is reported to the credit bureaus depends on the lender. “It really hurts long-term borrowers because it prevents them from being rewarded with access to lower-cost products when they make payments on time,” he says.
At the same time, alternative installment loans can offer faster financing compared to other types of loans. “Unlike bank loans, installment loans from non-bank lenders are usually funded quickly, sometimes as early as (the) same day for small loans,” he says.
Jory McEachern, director of operations for ScoreShuttle credit repair, gives simple advice: “Before you sign any forms, do your research ahead of time and compare terms with different companies. “
Using High Cost Installment Loans Successfully
If you are considering another installment loan, be aware that the most important rule to follow is to pay off your loan on time.
Mike Sullivan, personal finance consultant for Take Charge America, a Phoenix-based nonprofit credit counseling and debt management agency, says: “Late payments trigger fees, and after 30 days negative reports (go) to credit bureaus. An installment loan can help your credit, but only if it’s paid on time. “
Payment history represents 35 percent of your FICO credit score. An easy way to stay on top of your loan deadlines is to sign up for automatic payments, if offered by the lender. Alternatively, you can schedule automatic payments from your checking account to your loan each month.
Borrowing only what you really need can help manage loan payments and minimize interest paid over the life of the loan. Sullivan advises limiting yourself to one high-cost installment loan at a time to avoid overextending yourself, which could end up damaging your credit, instead of improving it.
Consider the alternatives
An alternative installment loan is only one option for borrowers with bad credit. There are other avenues available to you when you need financing but your credit is not perfect.
Depending on your credit score, it may be possible to qualify for a regular personal loan, which might offer a longer term than alternative installment loans. The caveat is that you can end up with an equally high APR, due to a low credit score. Zhou says people with bad credit might also consider a secured loan, which would require you to post collateral. You may be able to get a secured personal loan from your bank, if you have a positive banking history.
Whether you choose an alternative installment loan or another bad credit borrowing option, make a commitment to use it responsibly.
“People with poor credit should be very careful with the use of credit,” says Sullivan. “The goal of these consumers should be to use cash while slowly and carefully rebuilding their credit.”