Did you forget to pay your credit card bill last month? Or did you not have sufficient money in your account to pay your home loan installment? If yes, then you run the risk of having a bad credit score. A bad credit score reduces your chances of getting a credit card, an auto loan, a home loan, or any other form of mortgage, and thus, the only viable option available is of short term loans for bad credit / bad credit short term loans.
What is Bad Credit?
Bad credit essentially means that lenders do not have the trust to lend money to the borrower. It can happen when a borrower is not able to pay his obligations in full, or completely, or has a track record of delaying payments. In such a situation, the lenders do not want to risk their money, and either choose not to lend, or to lend at much higher interest rates than average.
It is also essential to understand that bad credit does not necessarily mean that the borrower had mal intentions and chose not to pay. It can also arise due to a financial crunch or a medical emergency. Therefore, sometimes it becomes essential to help the borrowers even if they have a bad credit score. This is where short term loans are of great help.
Is having bad credit a cause of concern?
Invariably, the answer is a firm, ‘Yes.’ This is because bad credit makes it extremely difficult for a borrower to get a new credit card, or get the credit limit increased on an existing credit card, avail a loan for business, or any new purchase. And even if they manage to get any of these, the interest rates charged would be on the higher side.
However, the good news is that it is possible to improve the credit score as well. This can be done by resolving the credit disputes on credit cards (if any), or by taking new loans and repaying them on time. Moreover, many companies are willing to lend to borrowers with bad credit also, primarily because they can mitigate the higher risk by charging a higher interest rate. These loans are usually given for a much shorter period, and sometimes even without collecting any relevant documents from the buyer.
What is a short term loan?
A short term loan is a loan that is given for a short period, ranging anywhere from 1 day to 1 year, unlike other traditional long term bank loans like auto, home, etc. that are given for a period of 10 to 20 years as well. In general, the interest rate charged on short term loans is much higher than the long term loans.
Short term loans are usually given to fulfill a temporary financial crunch or to meet some short term significant fund requirements. Sometimes short term loans are also given without any documentation, and in these cases, the interest rates are extremely high to cover up for the higher risk of default. The interest rates on loans are also inversely proportional to the credit score of the borrower. Lower the credit score, the higher the interest rate, and vice versa.
Are short term loans for bad credit feasible?
Short term loans, when given with proper documentation, can be a very profitable investment for lenders. However, short term loans for bad credit given without any or improper documentation can be a cause of bankruptcy, even for the most profitable companies. This is because the borrowers are aware that they have nothing to lose since they already have a bad credit score. Also, if a majority of borrowers have good intentions and take a loan for fulfilling a genuine requirement, a default by just a couple of buyers can be a harmful bet.
It has also been observed that a number of borrowers end up taking a new short term loan to pay back an existing older loan, and in this cycle, they keep defaulting partially on many loans one after the other. Thus, in general, it is not acceptable as a healthy financial practice.
Conclusion
Short term loans for bad credit can be availed by borrowers easily, but they should not be taken for granted. They should be considered as an opportunity to improve the credit score and not as a way of making easy money. Also, the lenders should consider all risks while giving out such loans, and not over-leverage in the lure of higher interest rates.