Monthly Archive April 2017

Payday Loans vs Personal Loans

Payday loans and personal loans may sound alike, but they’re hardly the same thing. For starters, a payday loan operates on a much shorter time frame — it is typically due on your next payday, according to the Consumer Financial Protection Bureau — while a personal loan usually carries repayment terms of two to five years. There are other characteristics that distinguish these two types of loans, so if you’re considering one or the other, be sure to keep reading. In this article, we’ll break down the advantages of a payday loan versus a personal loan and how each may affect your credit.

Payday Loans

A payday loan is a short-term, high-cost loan that gives cash-strapped consumers the money they need until their next paycheck. Payday loans are typically made for small amounts, so they aren’t ideal for covering major expenses.

When you apply for a payday loan, the lenders will ask about your job status and sources of income. You may also be required to give them access to your checking account or submit a post-dated check to cover the amount of the loan, plus a finance fee, once your paycheck is in your account. When you apply for a payday loan, a lender will not typically check your credit, so a payday loan will generally not impact your credit score.

If you don’t pay off the loan in its entirety, you’ll be hit with additional fees and finance charges. According to the CFPB, the cost of a payday loan, or its finance charge, may range from $10 to $30 for every $100 you borrow. “A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%,” the agency notes.

A payday loan may sound like a convenient way to get cash for consumers who don’t have savings shored up or credit cards. But it can be a very costly way to borrow. Because of the high fees and finance charges associated with payday loans, there’s a risk of falling into a long cycle of debt. If you feel you are short on money or won’t be able to cover the cost of the loan before your next payday, a payday loan may not be the best option for you.

Personal Loans

A short-term personal loan generally has a fixed interest rate and fixed repayment period. However, unlike payday loans, lenders make an inquiry into your credit when you apply for a personal loan, and each loan inquiry can lower your credit score a little bit.

If your loan is unsecured, or not backed by collateral like a home equity line of credit, you may find yourself stuck with a high-interest loan. That’s because lenders hike up their interest rates in order to protect themselves against borrowers who can’t make their payments on time. Another downside to personal loans is that if your credit isn’t up to snuff, you may be saddled with a high-interest rate. On the plus side, it can be easy to shop for a personal loan, and they usually don’t require that much documentation.

Credit unions can be good places to shop for a personal loan since they may have more lenient lending requirements and may be more willing to offer a short-term personal loan if you have less-than-stellar credit. Local banks and credit card companies can also be great sources for personal loans, especially if you’ve done business with them before and proven yourself to be a reliable customer.

Before shopping for a personal loan, it’s a good idea to check your credit score. Once you know your credit score, you can research a lender’s minimum credit requirements to see if your score will qualify you for a loan. Rather than apply for a number of personal loans, which would lower your credit score, we recommend applying for loans from one or two issuers that you know and trust.

Many online lenders offer personal loans to people who have less-than-perfect credit, but not all of them can be trusted. The Federal Trade Commission lists red flags to watch out for, including if a lender demands an upfront fee and doesn’t clearly disclose and prominently display what fees apply, or if a lender pressures you to wire money. Be sure to do your research, and don’t be afraid to take your business elsewhere if you don’t feel comfortable.

How to Get a Loan With Bad Credit

If you’re in need of some extra funds, but your credit isn’t in tip-top shape, you may be wondering how to get a personal loan and if it’s even possible. The good news is you can get bad credit loans that provide you with the cash you need even if your credit is less than perfect. You simply need to do some research and choose where you apply wisely — and we’re here to help you understand how to do that.

While a personal loan can help you get your finances under control, it is important to note that it may not be the answer to all your financial problems, so getting one should be done carefully.

Here are some tips to help you learn how to get a loan with bad credit.

Gather Your Personal Information

As you think about how to get a personal loan, you can start collecting some information a lender may ask about. Here are two main items to help you get ready to apply for a loan.

Credit Scores

The first thing you want to do before you apply for any loan is to understand your credit, as this will give you insight into the details a lender reviews when they pull your credit. (To do this, you can see where your credit currently stands by viewing two of your credit scores for free, updated every 14 days, on Credit.com.) Checking your own credit reports and scores does not affect your credit scores in any way. You don’t need perfect credit to be approved for a personal loan, but your credit scores impact the terms and conditions you’ll qualify for. For example, bad credit loans will likely come with a higher interest rate and may be issued for a lower amount.

If you see your scores are looking pretty lackluster, you may decide you want to improve them a bit before applying for a loan. Some credit score improvement options you may consider include paying down debts, reviewing your credit reports for errors (and disputing any problems you find), and limiting the number of inquiries placed on your credit until your scores rebound (more on that in a moment).

Proof You Can Pay the Loan Back

It’s important to note that lenders will want to know you can repay the loan before they issue it, and the amount they are willing to lend often depends on your ability to do so. It’s a good idea to show how you’ll be repaying them, whether by offering proof of income or a cosigner.

Talk With Your Bank or Credit Union

Next, research minimum credit score requirements for personal loans from lenders in your area. A good place to start is with the bank or credit union you currently use, as they already have an understanding of your financial profile. Something worth noting is that credit unions may have more flexible lending standards and may be more willing to offer you a small personal loan. If you’ve been at the same bank for years, consider reaching out to the bank’s loan department and ask them how to get a loan. You may also want to inquire if your credit scores would qualify you for a personal loan.

Consider Which Loans Are Best for You

Remember when we mentioned limiting the number of inquiries on your credit while you work to improve it? Here’s why: Each loan application you submit triggers an inquiry into your credit, and hard inquiries can lower your credit scores a little bit. So, when you decide to start applying for a personal loan, you’ll want to do your research and likely not apply for every loan you come across.

It’s a good idea to only apply for loans from a lender you trust with lending standards you feel confident you can meet. You may be able to find the minimum credit scores a lender requires for a personal loan on the lender’s website or you can call and speak with one of their representatives.

Be Aware of Scams

There are plenty of online lenders promising loans with no credit check to people who have damaged or bad credit. While this may sound ideal, you want to be cautious. These websites may be nothing more than advance fee loan scams. According to the Federal Trade Commission, a lender who doesn’t seem interested in your credit history is a big red flag and could indicate a fraudulent website.

It’s a good idea to double-check an online lender’s background before applying for a loan. Contact your state Attorney General’s office or your state’s Department of Banking or Financial Regulation to find out if a lender is legitimate and registered to do business in your state. You can also take a look at the Better Business Bureau to see if any customer complaints have been filed against the lenders you’re considering.

 

Brooke Niemeyer contributed to this article.