When most people think of loans designed for people with bad credit, they make a few assumptions. It’s easy to see how this happens. Loans for bad credit borrowers have had their fair share of problems over the years. This has led many people to believe that the whole industry is unnecessary, insecure, and unsafe.
Fortunately, the assumptions that many people make about bad credit loans are simply inaccurate. Rather than truly representing the industry and the people that it assists, these misconceptions fuel confusion. They spread unnecessary misinformation among thousands of people. Many of these people may actually benefit from bad credit loans, if they knew the truth about them.
So let’s redress the balance and go through the most common misconceptions the general public have about loans for bad credit.
Misconception #1: Loans for bad credit are ‘easy’ to get
While the threshold for acceptance on bad credit loans is usually lower than it is for conventional borrowing, it’s by no means “easy”. Borrowers still have to meet specific criteria set by the lender. This will usually involve a base minimum income and sound enough finances to ensure the loan repayments can be consistently met. Only if borrowers meet each lender’s specific criteria will they be approved for a loan.
Misconception #2: Loans for bad credit can only be short-term, “payday” loan style loans
Payday loans are arguably the most well-known loan product available for bad credit borrowers, but they are far from the only options. If you browse here at Bonsai Finance, you’ll be able to see plenty of long-term loan providers that operate along the same lines as standard loan providers. In fact, many companies that provide bad credit loans operate identically to standard providers. The only obvious difference in methodology is the willingness to accept applicants with adverse credit scores.
Misconception #3: Loans for bad credit are unaffordable
It’s important to acknowledge that any loan — standard, or provided to people with poor credit histories — can be unaffordable. It is the joint responsibility of the customer and the lender to ensure that the loan repayments can be met before a loan is agreed. While the APR may be higher on bad credit loans, this can still be affordable. The amount borrowed and the repayment terms must, however, be suitable for the budget of the borrower.
Misconception #4: Loans for bad credit are designed to be defaulted on
Many people believe that when lenders lend to people with poor credit histories, they are actively hoping the borrower will default. After all, when this happens, the lender can apply fees and potentially earn more from the loan than they initially would have been able to.
This, simply, is not good business sense. It is far more beneficial to lenders for loans to be paid back, on time, as expected. Chasing debts is an expensive business for loan providers and can reduce their profit to almost-nothing. This is why even bad credit loan providers are circumspect when lending. Providers go out of their way to ensure that a borrower can afford the repayment both for the borrower’s sake, and for the provider’s own. Nobody wants to have to deal with the cost involved in organising debt collection if the loan is defaulted on.
Misconception #5: Loans for bad credit trap people in a cycle of borrowing
This misconception seems to be based on the belief that bad credit loans and payday loans are one and the same. This isn’t the case; they are distinct financial entities that serve entirely different purposes. Unfortunately, the poor reputation of payday loans can impact people’s ideas about bad credit loans too.
Payday loans can trap people in a cycle of borrowing, though regulations introduced in 2014 helped to make this scenario less likely. Bad credit loans, however, don’t trap people in a cycle of borrowing. They operate like a standard loan, with an agreed amount to be repaid each month. Provided both the borrower and the lender have ascertained that the borrower can afford to make these repayments, there is no need for further borrowing. Thus, there is no cycle for the borrower to be trapped in.
Furthermore, it is worth noting the fact that this misconception also overlooks the fact that bad credit loans can actually help people to escape a cycle of borrowing. If a borrower uses a loan to pay off other debts, they can make their finances far easier to manage. This can ultimately set them on the right course for an improved monetary outlook in future.
Misconception #6: Bad credit loans aren’t provided by reputable companies
Bad credit loan providers may not be as recognisable as the high street banks and building societies we are all familiar with. This, however, does not mean they are lacking in credibility. Bad credit loan providers are all highly regulated and have to adhere to strict codes of conduct when operating in the sector. If lenders violate these regulations, the penalties are severe.
While bad credit loan providers may not be as well known as high-street lenders, they are still subject to all the necessary checks and balances. It’s required of them if they are to operate in the financial industry in the UK.
Dismissing some of the most common misconceptions about loans for bad credit is vital. These loans fulfil a genuine need in the marketplace. Bad credit loans can help to provide financial assistance to those that the system has otherwise abandoned. They can indeed be a vital tool to helping people find their way back to the feet after a series of difficult experiences.
If busting these misconceptions has caused you to consider a bad credit loan, you may want to investigate your options further. At Bonsai Finance, you are able to compare bad credit loan offers, and see if you can find the right financial product for you. Given you now know the truth about bad credit loans, it’s worth considering if there is a financial issue you have been wanting to address.