In discussing bad credit loans, we need to look at what caused lenders to create this type of loan, and also how bad credit loans became so popular.
We mentioned in the beginning about the "credit crunch" beginning back in 2008. This is where the banks and lenders started to experience heavy losses due to loans they made prior, and many of those loans were being defaulted on.
In part the high default rate was due to the economy, and also due to the fact the banks did not properly underwrite the loans. This means the bank or lender did not properly investigate the borrower prior to granting the loan. This caused a high probability of default.
As the banks experienced these losses, their reaction was to tighten the money belt, and not grant as many loans. So it became difficult for businesses and individuals to borrow money and get the loans they required.
If you couple this, with the fact that there had been many insolvencies and people who had experienced financial difficulties, resulting in poor credit, it is easy to see a huge market for loans specifically for people with poor or weak credit.
This is how the bad credit loan market grew.
There have always been high risk lenders, who granted loans to people with poor credit, but the market or population for such loans has grown over the years.
The bad credit loan market can be divided up into various segments or types of loan.
Payday loans are short-term loans that are easy to qualify for due to the fact that in most instances all the borrower needs is a job and a bank account. There is no credit check, so for someone with poor or bad credit, payday loans can be a short-term solution.
Guarantor loans are another solution for someone who is looking to borrow money and has poor or no credit. The borrower needs someone to guarantee the loan for them. This can be a close friend or family member. In some instances the guarantor must be a home owner, but this does not always have to be true. There are some guarantor loans where the guarantor just needs excellent credit to guarantee the loan.
Guarantor loans can be paid back over a longer period of time, up to 60 months, whereas a payday loan usually has to be paid back within 30 days.
Logbook loans are another form of a bad credit loan. These loans operate by lending someone money based on the value of their car. So the borrower must have a car.
The lender assesses the vehicle and will lend a specific amount of money based on this assessment. The borrower then gives the logbook for the car to the lender, and the lender now in essence owns the car.
As long as the borrower makes the agreed payments, they can have use of the car. If the borrower defaults, the lender can then take/repossess the car.
An instalment loan is a loan with a set number of payments to be paid until the loan is paid in full.
This form of bad credit loan is very similar to an instalment loan for someone with good credit.
The differences will be in the interest rate that is charged and also the loan amounts and the term of the loan.
Home credit or doorstep loans have been around since the beginning of lending and borrowing.
The process was the "loan man" would come to your house, hence the name doorstep loan, and would evaluate you for a loan. Once the loan was granted, which could be right there and then, and possibly even give you the cash right there and then, you would make weekly or monthly payments, and the loan man would come to collect those on the date due.
The process hasn't changed much, although you can now apply online, and in some instances make payments by Direct Debit. These types of bad credit loans carry a high interest rate, and the loan amounts are usually low, £500 or less.
In our world today, it is difficult to imagine living without a credit card. You need one if you want to book a hotel or air fare. They are convenient to carry, and easy to use.
However, credit cards can be a high risk loan to lenders. They give you a credit limit and then you can use the card to purchase whatever you wish. Since they are an unsecured loan/credit limit, if you default on the card, the lender doesn't have anything to take back or repossess.
Credit cards for people with bad credit have been around for some time now. They can be a good way for someone who has had credit problems in the past to re-establish themselves and rebuild their credit file.
Many of the credit card providers for people with bad credit, will initially approve the credit card with a low credit limit, e.g. £200. Then as the borrower uses the card and shows a good payment history, the lender will periodically increase the credit limit.