An applicant needs bad credit loans under the following circumstances:
- The applicant has defaulted on their previous loan payments.
- He or she has defaulted on their credit card payments.
- The applicant has never taken a loan and has no financial track record whatsoever (applies to people just starting out on their careers).
- A previous loan application has been rejected based on bad credit ratings.
Features of Bad Credit Loans
- The loan is given at low interest rates.
- This loan disregards the applicant’s credit history.
- The loan processing is quick.
- The tenure period is flexible.
- The applicant is eligible for high amount loans.
Benefits of Bad Credit Loans
- The applicant does not need to worry about a loss to property/asset.
- High loan amounts can be availed.
- There is minimal documentation.
Disadvantages of Bad Credit Loans
- Since the loan is given despite a bad credit rating, the loan is heavily tilted in the lender’s favour. The terms and conditions are drawn in such a way that they give the lender an advantage.
- These loans have high interest rates as the risk on investment is high for the bank.
These loans usually have a short tenure.
Types of Bad Credit Loans (Secured Loans)
Banks in India offer bad credit loans in the form of secured loans. A secured loan is given in exchange of some collateral, which may be in the form of an immovable property such as land or apartment or a moveable asset like an LIC endowment policy or gold. Failure to repay the loan will lead to loss of property / asset as the bank will have to sell it off to get their money back.
lendforall offer various types of bad credit loans. Some of these are:
- Mortgage Loans or Loans Against Property: These loans are taken when someone mortgages their property. They can get their property titles back only after they have repaid the loan. Some banks allow second mortgage loans on the same property.
- Business Loans: These loans are taken for starting a new business or expanding an existing one. They can also be used for sustaining an existing business.
- Car Loans: These loans are taken in order to purchase a new car. Bad credit loans for purchase of car allow people with low scores to get their dream vehicle or even start their small transportation business.
- Home Loans: These loans are taken in order to purchase a new home, renovation and repairs. Since home loans like mortgage loans are secured on the real estate, they are less risky for banks as they can sell off the property in case of default in repayment by the borrower and get their money back.
How Bad Credit Loans are different from other loans?
- Collateral has to be given in order to avail the loan.
- The interest on these loans is low, though not as low as the rates given to borrowers with good credit scores.
- The loan is tenure is quite flexible.
- The loan amount borrowed depends on the value of the asset that has been pledged.
- The applicant can choose the type of interest rate they want; i.e. fixed or floating.
- Different types of loans are offered based on the applicant’s requirements.
- Non-salaried individuals can also apply.
- The loan approval process is much faster as against an unsecured loan.
Why Apply for Bad Credit Loans?
- The applicant can apply for big loans as the loan amount is based on the value of the collateral.
- The applicant is bound to get better terms and conditions than what they get for unsecured loans.
- Individuals with a poor credit score can also apply successfully for bad credit loans.
- This loan can be applied online as well as offline.
- Borrowers benefit from low EMIs due to long tenures.
- The tenures of bad credit loans are flexible.
- The minimum income requirements are on the lower side.
Why you should not apply for Bad Credit Loans?
- Failure to repay the loan will lead to loss of property / asset.
- There is a lot of paperwork involved.
- The applicant has to be the full owner of the pledged property or asset; else you cannot apply.
- Failure to pay back the loan will have a negative impact on the applicant’s already low credit score.
- The lender decides the terms of the loan.
- Loan amounts that exceed the value of the collateral are not approved.
Eligibility Criteria for Bad Credit Loans
- The applicant should be a resident of India.
- They should be at least 18 years of age.
- Some banks require that the applicant should have a minimum income of Rs. 3 lakh per annum.
- In case of businesses, it is required that the said business be in operation for at least 3 years.
- Salaried, non-salaried and self-employed applicants can apply.
- The applicant should have the repayment capacity with regards to the loan amount.
What is the difference between a secured loan and an unsecured loan?
There are some differences between bad credit loans that come under secured loans and unsecured loans. These are:
- Collateral: Collateral is required for an unsecured loan. In secured loans, there is no such requirement.
- Interest: The rate of interest for secured loans is low whereas the rate of interest in unsecured loans is high. This is because the risk for the bank is more in unsecured loans.
- Tenure: The tenure is quite flexible in secured loans. It can be taken for a longer period of time. This is not the case in unsecured loans, as the loan tenures are shorter.
- Loan Amount: In secured loans, the amount of loan depends on the value of the pledged property. In unsecured loans, no such restrictions exist as the loan amount is decided after checking the repayment abilities of the bank.
Things to Know Before Applying for Bad Credit Loan
- Rate of Interest for Bad Credit Loan People
The rate of interest in bad credit loans is low as compared to unsecured loans. This is because an asset has already been pledged. This makes the bank comfortable with the applicant’s repayment abilities and they are sure of getting their money back. The applicant can thus avail attractive interest rates. The interest rates offered by the bank are usually of two types: fixed and floating.
- Fixed: The interest remains the same throughout the loan tenure. As such, the EMI amount also remains the same. This allows the applicant to plan his or her repayments accordingly.
- Floating: The interest keeps changing due to market conditions and changes in RBI policies. This means that the EMI amount will keep fluctuating. This will create problems for the applicant has their EMI amounts will go up and down somewhat.
Most banks offer a mix of fixed and floating interest rates, with the first part of the tenure being fixed and the rest of the period having a floating interest rate.
- EMI Amount: Equated Monthly Instalments are monthly repayments that an applicant makes with the intent of repaying their bad credit loans. The EMI amount is calculated based on the principal amount, rate of interest and loan tenure. This amount can be calculated using an EMI calculator which is available online on the Paisabazaar.com. All that the applicant has to do is fill out the necessary information. This calculator is helpful in the following ways:
- Planning: Once the EMI amount is ascertained, the applicant can plan their repayment.
- Saves Time: The applicants do not have to rely on others in order to know their approximate EMI amount. They can calculate it themselves and plan accordingly. This helps them save time.
- Different Combinations: The applicants can try out different combinations and see which loan amount, interest and tenure combination suits them best.
Factors to Consider When Availing Bad Credit Loans
There are certain factors that anyone applying for a bad credit loan should keep in mind. These are:
- Collateral: A property / asset has to be given in order to avail the loan. Failure to repay the loan will mean loss of the property / asset as the bank will sell it off to recover their money.
- Terms and Conditions: It is important to go through the terms and conditions before agreeing to anything. It is advisable that an applicant should consult a finance expert or an accountant, if necessary, to understand the loan process in more detail.
- Loan Size: The size of the loan will depend directly on the value of the property pledged. An amount exceeding the value of the said property cannot be availed.
- Full Ownership: It is important that the applicant be a full owner of the pledged property. Part ownership will not suffice.
- Rate of Interest: Most banks offer a mix of floating and fixed interest rates. In the tenure with fixed rate of interest, the EMI amount will remain the same. In the period with floating rate of interest, the EMI amount will keep fluctuating due to market forces and other factors.