Questions to Ask Before Taking Out a Short-Term Bad Credit Loan

By Angela Monroe - November 26, 2019

When planning to take out a loan with bad credit, one of the best options you can get is a short-term bad credit loan. Designed especially for borrowers with bad credit, this type of financing helps you borrow funds that are payable in two years or less.

Before taking out a short-term bad credit loan, it is smart to do your research to determine your fitness for this financing. The following are several guide questions to get you started.

“How does a short-term bad credit loan work?”

Bad Credit History

A short-term bad credit loan is personal financing designed for borrowers with bad credit. It disregards your bad credit history, which is supposedly one of the most important requirements to get approved for a loan. Instead, your source of income is checked to determine your capacity for repayment. This can be proven by your bank statements, income tax return and collateral.

Short Repayment Term

A bad credit loan is typically short-term, which means that the repayment should be completed in a short time, usually within several months. There are lenders, however, that extends the repayment up to two years.

 High-Interest Rate

Given your bad credit record, which is usually due to the history of late debt repayments and loan default, lenders find it risky to lend you money. To compensate for this risk, they charge a higher interest rate than standard loans.

“Where can I get this financing?”

Online Lending Services

A short-term bad credit loan is typically offered by online lenders. This non-traditional way of getting a loan not only removes the person-to-person communication between you and the lender but also makes the entire process fast and sometimes paperless. 

Fast Application and Approval Process

Generally, your application starts when you fill out an online form. Then, a lending representative calls you on the phone to discuss your application and qualifications for the loan. You may need to submit a few documents, like soft copies of bank statements and proof of income. This process usually takes no longer than 24 hours. You should get a decision within this timeframe. Once approved, you will get a loan offer. If you agree, you can get the money via bank transfer.

“Do I need to pledge collateral?”

Most providers of a short-term bad credit loan do not require collateral. However, it is wise to offer an asset as collateral if a lender approves of it. This lowers down the associated risk of lending you money, which in turn convinces the lender to lower down your loan’s interest rate. 

Make sure, however, that you can make the repayments based on the agreed term. If you fail to do and default on your loan, the lender has the right to repossess and sell the asset you pledge as collateral. This is on top of your bad credit record getting worse, worsening your already damaged credit rating and making much more difficult for you to secure financing in the future.

“How much can I borrow?”

The amount you can borrow from a short-term is usually limited to $10,000. The smaller the amount, the shorter the repayment term.  A payday loan or fast cash loan is usually arranged quicker and does not require collateral. However, requires to be repaid between 16 days and one year, provides a loanable amount of $100 to $2,000.

For bigger amounts, you may have a longer time to complete your loan. Remember, however, that you will also have to pay the high-interest charges for a longer time.

“How high is the high-interest charge?”

The interest rate of a short-term bad credit loan will depend on the amount you take out and your financial capacity for repayment, including any downpayment you provide and collateral you pledge to secure the loan. It also varies from one lender to another.

A short-term bad credit loan may charge up to 400% APR, excluding all the associated fees that come with your loan.

Loan Sharks

It’s always smart to do your research and compare offers instead of accepting the first loan offer you get. While a short-term bad credit loan helps with your money woes, it is also often used by loan sharks.

Loan sharks are lenders that offer quick loans in exchange for impossibly high-interest rates and fees. These predators often prey on borrowers with bad credit who are desperate to get financing. They are usually not licensed because their loans have interest rates that are generally well above an established legal rate. 

The best way to deal with loan sharks is “don’t”. Their goal is not to help you get out of any financial trouble but to make plenty of money. This is through offering a loan on very bad terms and a huge rate of interest. If you’ve borrowed money from one, contact the Australian Securities and Investments Commission office immediately for assistance. If f the lender is not licenced to operate, you are under no legal obligation to repay the debt if the lender is not licensed by ASIC. 

“What are the fees I need to pay?”

No matter how high are the fees and charges of a short-term bad credit loan, they must not exceed the capped amount set by the Australian Government. According to the Australian Securities and Investments Commission, lenders only charge when:

  • A one-time establishment fee of not more than 20% of the loaned amount
  • A monthly account keeping fee of not more than 4% of the loaned amount
  • Penalty fee for default that’s not more than twice (200%) the total amount of your loan, which includes any repayments you made under the contract plus default charges
  • Enforcement expenses, which cover the costs of the lender going to court to get their money

However, lenders are not allowed to charge you interest and direct debit fees on short-term personal loans entered into from February 2017. This exempts loans offered by Authorised Deposit-taking Institutions (ADIs), like banks and credit unions.

“Will a short-term bad credit loan benefit me or will it put me deeper into debt?”

Just because you “qualify” for this type of financing doesn’t mean you should get it. Weigh your financing need and financial situation to have a good idea of how ideal is a short-term bad credit loan for you. 

A short-term bad credit loan may greatly benefit you if:

  • You have an unexpected expense that needs to be paid right away, like a doctor bill or a car repair
  • You have a regular source of income, like employment, business or pension that can cover the cost of repayments
  • Your poor credit rating is often caused by late payments. Payment history is the biggest factor that affects your credit score. If you handle your short-term bad credit loan responsibly by making timely repayments, your credit score will eventually improve.

On the other hand, it may not be advisable to take out a short-term bad credit financing if you do not have a regular source of income. The monthly obligation can become overwhelming if you do not have a secure source of funds. Remember that this type of financing is more expensive than standard loans and has a short time for repayment. 

If you cannot complete your loan obligation on its end term, you will only get stuck deeper in debt. Your already damaged credit record will also worsen, making it much harder for you to get loans in the future. Worst, the lender will repossess and sell any collateral you pledge to recover the money they loaned to you.

 

Loans For People With Bad Credit is a finance broking company in Australia. We help people across the country get access to the financing they need regardless of their credit score. To apply or inquire about our services, call 1300 769 384 or request a Quick Quote.

 

See also:

What are the Advantages of a Bad Credit Loan?

How a Personal Loan Affects Your Credit Score

Getting a Debt Consolidation Loan When You Have Bad Credit

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.

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