Loans with bad credit and no guarantor from direct lenders may be more complicated than you expected. If you need funds to finance your emergency needs, you should consider a loan with payments that you can afford, which is the most crucial factor that many borrowers overlook.
Which is better – Short-term or long-term loan?
If your score is bad, you are going to pay high interest regardless of the term size. Short-term bad credit loans attract you because you have prejudices that you can get rid of debts quickly, but these loans are harder to afford than long-term loans. Understand it by an example.
Suppose you have borrowed £400 that you are supposed to pay back within two weeks along with £60 interest charged on the full debt. In total, you will pay £460. If you take a long-term loan, for instance, for 12 months, you will be able to borrow more money than you could with short-term loans. Suppose you have taken £1000 for 12 months at 100% per annum. Your monthly instalment will be £135 toward principal and £619.95 toward interest.
If you take a short-term loan, you will pay £460 in two weeks. If you take a long-term loan, your monthly payment will be £135 plus interest that continues to abate with each instalment. So, you can manage your finances more wisely. Shorter payments are always much more expensive than longer payments. If you have a bad credit history, you should take out instalment loans.
Short-term loans usually carry higher interest rates and chances are you will get under the vicious circle of debt. If you cannot get long-term loans from direct lenders due to any reasons, make sure that you have a repayment capacity within a short period. To ease burden, either you can put collateral against the loan or you can arrange a guarantor. In this case, your lender has flexibility to release funds by selling your asset or calling upon your guarantor. Collateral and guarantor allows you to take out the loan at lower interest rates.
Look out for amortisation
While applying for long-term loans, you should look out for amortisation feature. It means you will pay interest along with your principal amount. With such facility, your interest payment will continue to be lower and lower.
Whether you apply for short-term or long-term loans, you must consider your repayment capacity. Neither of the options is worth applying if you fail to pay back on time. Many borrowers end up with taking a rollover loan and in the end, they find themselves caught in a painful debt spiral.