If you’re up to your eyeballs in debt, it’s easy to feel desperate. While your situation may feel impossible, now is not the time to incur more debt. When you’ve got a bad credit rating, you can be sure that legitimate lenders of the conventional type, such as your bank or credit union, won’t be willing to give you a loan. If you can’t meet your payments now, taking out another loan ultimately puts you in the same position sometime down the road. Banks regard this as a ‘borrowing from Peter to pay Paul’ scenario. Here’s where the bad credit lenders start lining up to take advantage of your desperate financial situation.
You’ve probably heard of ‘loan sharks’. These bad credit lenders, as they’re known today, are not the good Samaritans they portray themselves to be. Bad credit lenders know that you’ll eventually be unable to pay the loan. So, why are they willing to take the risk in giving you a loan? First, they’ll be charging an exorbitant rate of interest. They know that no one else is willing to give you a loan, so ‘beggars can’t be choosers’. You’ll accept the loan. Second, they will demand collateral equal to the value of the principle. This collateral will be in the form of an easily salable item, such as your car.
Let’s say you take a loan from one of these unscrupulous lenders, in the amount of $2500, with an APR of 29%, with your vehicle as collateral. You look over the contract and the monthly payment seems manageable. You intend to use the $2500 to pay down, or catch up on past due payments on other credit cards or retail debts. On the face of it, this bad credit lender seems to be a ‘good guy’, allowing you to get out from under your present financial crises.
The problem lies in that APR. The contract does not spell out how much of that monthly payment goes to principle (paying off the $2500) and how much is simply keeping up with the interest. There ought to be a law which requires that a lender’s contract specify how that monthly payment breaks down, in terms of principle and interest, but there isn’t such a law.
If you read the contract carefully, you’ll see that it stipulates that, should you default on the loan, your collateral will be forfeit, seized and sold to satisfy the debt. However, the desperate loan seeker thinks there’s no chance that they won’t be able to make that monthly payment.
Once you sign on the dotted line, the bad credit lender has got you into a guaranteed untenable situation. The lender is now listed on your car’s title as a co-owner, so you cannot even sell your car without the lender being paid first.
Having spent the $2500 reducing or paying down other debts, you’ve effectively stuck your head in the noose. After making the first payment, your statement from the bad credit lender will show that you’ve – perhaps – reduced the principle by just $25, with the remainder of your payment applied to interest. These types of loans are virtually impossible to pay off.
That fine print on the definition of ‘default’ may be ambiguous or in legal language that is open to interpretation for the layman. Bad credit lenders may allow you to miss a payment, or even two, tacking on a substantial late fee. Within a few months, you may owe more than the initial loan amount. Then the lender steps in and seizes your collateral. You have not a legal leg to stand on in any court of law. The lender then sells your vehicle at auction, well below its market value. Now you have no car and are still in debt to the lender, who allows the interest to pile up as he prepares the paperwork necessary to sue you in court for the remainder. He gets a judgment against you.
It’s easy to see that no matter how difficult your current financial position may be, you should avoid these bad credit lenders like the plague.
The best solution is to instead engage a credit consolidation organization. Such organizations are usually able to negotiate with your creditors for a lower APR and may also get some late fees waived. Your creditors don’t want you to default – they want to be paid. By consolidating your debt, you can pay it all off, over time, with a single monthly payment you can afford. Your credit score will improve as well. Good luck – this plan works.