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5 Things to Watch Out For With Installment Loans for Bad Credit

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Should installment loans for bad credit be banned? Is short term loan bad for borrowers? The answer is difficult and may boil down to the borrower’s situation.

Installment loans are short term loans that are often targeted at low-income people, who otherwise are hard-pressed to or they cannot get a credit line. Lenders attract these people like a starved mouse to a cheese left in the open. Often, the cheese is laden with other stuff that makes life even harder for the borrower.

We don’t mean to put down installment loans. They can be a lifeline to someone who truly needs cash now. But like payday loans that they resemble, installment loans are replete with traps.

Here are five tips to know before cashing in on this loan:

1. Do you really need installment loans for bad credit?

A hospital emergency or tuition deadline may justify the loan. But purchasing a smartphone or tablet on a limited promo offer is definitely not.

An effective way to look at installment loans is this—imagine it as a root canal appointment. You’ll want to forego it unless you really need it, won’t you? Installment loans for bad credit, like other short-term loans, are designed as an expense, not as an investment.

2. Make a background check

Lenders conduct a credit check on you to assess your credibility. You should return the favor. Installment loans are a favorite among scammers and loan sharks; that’s not to say there are no legitimate lenders out there.

Ask someone their experience with the lender. Check Internet forums. Research if they are an authorized business with your local trade office. These small inconveniences may protect you from being taken advantage of.

3. Scrutinize the terms

The first thing to watch out is the aggregated interest rate. Don’t be fooled by published rates. Often, they hide other rates, such as penalties for late payments, extended payments, quarterly rates, and refinancing schemes.

Also make sure that the interest rates abide by state and federal regulations, which often put a cap on how much lenders can charge.

A common practice among creditors—as one major lender is found out by ProPublica—is to jack up the interest rate with unnecessary insurance products. Although these items are voluntary, creditors try to hide this fact; instead, they gloss it over with the specter of the borrowers having their loans approved.

It’s like a bad cop-good cop spiel. A borrower who has been turned down by mainstream creditors tends to gravitate to the sympathetic short-term lender. Make no mistake, they don’t sympathize; they just calculate the risk of earning bucks off you.

4. Can you pay the principal of an installment loan for bad credit?

This should be your first question when you consider an installment loan. You should be able to pay off the main loan, not just the interest. Make sure your monthly payment includes the principal. Nothing makes a lender happier than have borrowers pay the interest and leave the principal unscathed. It means they can charge you longer and earn more off your loan.

Be honest when you do the math. To begin with, you’re probably in a tight budget that’s why you are considering an installment loan.

List all your expenses on one column and your monthly income on another. The variance should be bigger than your monthly installment payment. If not, an installment loan will pin you down deeper into the financial abyss.

Also consider future income streams. Are you or your partner expecting a new job soon? Is there a project that will provide a return soon? These streams can offset your installment payments and you should factor them in when considering for a loan.

Conversely, project your future expenses. A new baby is in the offing maybe. Or the kid is off to college, which means bigger expenses.

5. Don’t refinance short-term loans (unless necessary)

Again, the root canal principle applies here. Do not refinance short-term loans. They are already designed as an expense with exorbitant rates. Extending them is like asking for more root canal than what is necessary.

Keep in mind that a refinanced loan may add a separate refinance rate on top of the principal interest rate. Some lenders are known to extract as high as 200% through refinance schemes. This is legal because the refinance rate is separate from the principal interest; thus, the individual rates subscribe to interest caps set by state and federal regulations.

CONCLUSION

We hope you will not need an installment loan, just as we hate a root canal. Installment loans are a symptom of bad finance; we only need them in dire straits. These tips are meant to protect you from making a bad thing worse; they do not encourage you though to get an installment loan.

HAVE YOU HAD AN INSTALLMENT LOAN? WHAT TIPS CAN YOU SHARE TO HELP OTHERS AVOID THE SAME PITFALL?


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