Bad Credit Loan Basics

Bad credit loan

Bad credit happens when a person fails to make payments on debts or loans. This is often reflected in the person's credit history and is then translated into a person's credit rating. When a person has a low credit rating, they are considered a high risk when it comes to loans. If you find yourself in this predicament and you need to take out a loan, your possible option would be to take out a bad credit loan.

Why Did I get a Bad Credit Rating?

Bad credit often comes with a few circumstances. It could be due to irresponsible spending, late payments on credit dues or even missing a payment altogether. While reasons may vary for these events, whether they be valid or not, these will still give you that bad credit rating that can only mean the only possible loan you can avail of is a bad credit loan.

Types of Bad Credit Loans

There are two main types of bad credit loans, the secured and the unsecured bad credit loan. A secured bad credit loan is a loan that you can get by using an asset as collateral, usually a house or a car. While you can use your property as a guarantee for the secured bad credit loan, other factors will still weigh heavily on the amount you can borrow.

An unsecured bad credit loan is a loan that is rather hard to come by. While it may be pretty difficult to find, there are a few lending institutions that do provide this kind of a bad credit loan. You will probably have to do a bit of research and searching to find one. Some lenders, known as sub-prime lenders, can give out these unsecured bad credit loans.

The Risk of Bad Credit Loans

We know that lending companies view bad credit loans as a risk, but did you know that taking out a bad credit loan generates risks for the borrower as well? Some of the risks that borrowers face when taking out a bad credit loan is the possibility of bankruptcy. This is a possibility especially if you are deeply in debt and do not have a very stable source of income.

Another risk that comes with a bad credit loan is the loss of your security or collateral, which is usually your home. Unless you are certain that you can make the payments on your bad credit loan, you should try to reassess whether or not the loan is worth risking your home on. Sometimes the loss of a home may not seem inevitable when you take out the loan but certain circumstances could force you to ultimately lose the roof over your head, so thinking twice before taking out a bad credit loan is imperative.

A bad credit loan also carries a risk of higher interest rates. You should shop around for the bad credit loan with the lowest possible interest rate since a bigger interest rate means a bigger monthly payment.