The difference between a bad credit loan and payday loan?
Short term lending can include a variety of different loan types: payday loans, bad credit loans, guarantor loans… The list goes on!
These loans can be incredibly valuable, especially to cover last minute payments or unexpected bills. So, it’s no wonder why so many people opt to take out short term credit. The only problem is deciding which of these products might be best for you.
It largely depends on your individual circumstances – how long will you need to borrow for? How much will you need to take out? For example; payday loans are generally used for smaller amounts, and are designed to be cleared by the applicants next payday. As payday loans should be cleared in relatively short timescales, the interest is much larger than many other types of loan.
Bad credit loans, on the other hand, are designed specifically for people who don’t have a high credit score or a complete credit history. They do vary in length, but are also considered to mostly be a short term lending solution.
Both payday loans and bad credit loans can be extremely beneficial. However, in order to make the most of your money, it’s important to understand which one will be better for you.
What does bad credit mean?
In order to understand the differences between bad credit loans and payday loans online, it’s important to understand what the term bad credit actually means.
Someone with bad credit might be someone who has an incomplete credit history. This means they haven’t actually taken out many (if any) forms of credit and are not registered on the electoral roll. It may also apply in certain scenarios where a credit reference agency has two separate credit files for one person. This can be resolved in most cases by directly contacting whichever credit reference agency you use.
More commonly, bad credit refers to people who have consistently missed bill payments, has multiple maxed out loan accounts, has defaulted on payments or even has a CCJ. All of these negatively impact your credit score, so having too many of these marks can drastically decrease your credit score.
Essentially, bad credit refers to an individual that direct lenders would be hesitant to lend to. As the bank might consider you a risk, you will be ineligible for certain loans and applying could do more harm than good.
How can bad credit affect you?
The main disadvantage of bad credit is that you are much more likely to be refused a loan. This could leave you in difficult situations if you desperately needed access to money. Bad credit can also make it difficult for you to rebuild your credit file, as it will be harder to take out the credit you need to start increasing your score.
Other side effects include much higher interest rates, lower loan amounts and shorter payment schedules. Bad credit can also make it harder to obtain things like phone contracts, finance payments or even insurance (if you pay monthly).
How are payday loans and bad credit loans different?
The main difference between bad credit loans and payday loans is usually to do with the credit check that the lender will carry out as part of your application. Whilst many payday loan providers don’t complete an intensive credit check, most lenders will check your credit file to some extent.
A bad credit score might mean that you could be refused a payday loan. Or if you are accepted, you might be given an incredibly high interest rate. This can make it harder to pay your repayments and means a larger total repayable amount.
A bad credit loan is very similar to a payday loan, only it’s made exclusively for people with bad credit. The interest rates will still be relatively high, but you are much more likely to be accepted for a loan.
Why apply for a bad credit loan?
If you were to apply for any loan with bad credit, you’re much more likely to face a rejection. This will show on your credit file as another bad mark, potentially reducing your credit score even further. This, in turn, will make it harder for you to increase your credit score.
As a bad credit loan is made specifically for borrowers with a lower credit score, it’s likely you’ll be accepted. This will not show on your credit file and will give you the opportunity to actually increase your score, provided you make any agreed payments by the set date.