Credits to avoid

There are situations where we can be tempted to opt for really bad credit choices. On this page, you will find a few examples of credits that are best avoided. Instead of falling for the payday loan commercial or that easily accessible SMS loan, explore your other options – they might be more of them than you think.

bad loan

How much governmental assistance you may entitled to varies depending on geography, but an online search can help you. As an example, UK residents receiving certain income-related benefits can apply for interest-free budgeting loans, and those in this group who struggle to keep up with interest payments on a home mortgage loan can apply for extra money as part of their benefits. If you’re renting from a private landlord in the UK and you’re receiving certain income-related benefits you can, in certain situations, apply for extra money help pay your rent.

If you’re on a low income in the UK, you can get special help towards the costs of arranging a funeral. There is also a one-off payment to help pregnant low-income women with maternity and baby items. As your child ages, there is special aid available to help with school meals, uniforms, and more. Older UK residents can apply for free bus travel, help with winter fuel payments, and a range of other things. These are just a few examples of assistance available in the United Kingdom.

Another alternative is to contact a credit union. They tend to have much better terms for their loans that private payday lenders and similar.

Sometimes, charitable organizations might provide you with a loan. There are also charitable organizations that offer free debt advice and can help guide you to a suitable credit option. If you live in the UK, contact StepChange Debt Charity, the National Debtline or Citizens Advice.

Get a payment plan instead

It is not unusual to see desperate people take out payday loans or other expensive credit options to pay for something in situations where a payment plan would have been a much cheaper alternative. Always ask for a payment plan before you explore expensive credit alternatives. A lot of companies are willing to negotiate a payment plan with you, especially if you have been a good customer that has paid her bills on time in the past and is now going through a rough patch. You may for instance be able to pay that electrical bill a month into the future instead of today, or pay down your up debt with a small monthly payment instead of incurring more and more late fees. Medical and dental emergencies are two other examples of situations where payment plans are often available and more beneficial than expensive emergency loans.

Credits to avoid: The payday loan

A payday loan is a short-term loan that must be paid back in full, including interest and fees, on your next payday. Since payday loans are such short-term loans, they tend to come with low interest but a hefty fixed fee. Simply charging interest on the loan would not give the lender much of a profit since the loan is to be paid back so quickly. This is why payday loans can seem affordable when you look at the interest rate only.

Payday loans are normally completely unsecured or secured with a post-dated check. If you don’t pay the loan back in full (including interest and fee) on your payday, the lender can cash in the post-dated check.

Since the payday loan is such a short term loan (as opposed to a long-term payment plan), it is easy to find yourself in a downward spiral where so much money from this paycheck went to paying back the payday loan in full that you are now looking for a new payday loan to tie you over until next payday, and so on. With the large fees, this is a very expensive way of living.

Credits to avoid: The SMS loan

An SMS loan is a loan that you apply for by sending an SMS to the lending institution. SMS loans are typically small short-term loans. The convenience of these loans has made them popular. When they were first introduced, the time between being approved for a loan and getting the money deposited into ones bank account was very short, so a guy finding himself out of cash in a bar at midnight could send out a text and have his bank account refilled with several hundred dollars within a few minutes. Today, there is usually a forced time delay between approval and money deposit to protect lenders from really bad decisions. Still, the SMS loan is not a type of credit that you wish to use. They tend to come with a high flat fee, and if you don’t pay them back on time the interest rate + late fees will turn a small debt into a big debt.

Credits to avoid: Credit cards – if you can’t handle them

bad creditFor most people, credit cards are great. You can use them as a charge card and pay the bill in full at the end of the month, while also knowing that if you’re in an emergency you do have a line of credit to dip into that you can then repay over the course of a few months.

However, there is always the risk that a credit card holder uses her credit instead of cutting back on expenses. If you are in a situation where your income does not cover your costs, racking up credit card debt will only make things worse. If cutting back on costs is impossible and you are in a temporary situation where your income isn’t large enough, it is probably better for you to apply for a personal loan with a reasonable rate (while your credit rating is still good!). The interest rate for credit cards can be remarkably high.

Is pawning a credit to avoid? It depends on the situation

Pawning an object is normally better than getting a paydayloan, SMS loan or similar since secured loans tend to come with better terms than unsecured loans. Also, pawnbrokers will normally not report if you default on the loan, so a default will not hurt your credit score.

When it comes to pawning, it is important to be honest and assess the situation objectively. Are you really likely to be able to pay back the loan (with interest and fees) within the foreseeable future? Or will you simply end up in a situation where you keep on making interest payments for a few months and then ultimately default on the loan and lose the pawned object? If your financial situation is shaky, it might be better to actually sell the object outright instead of first receiving much less than what the object is worth in the form of a loan and then throwing away money on interest payments. Most pawnshops double as second hand shops and will purchase objects.

Creditors to avoid: Loan sharks

Loan sharks are lenders that work without the required license and typically charge exorbitant fees and interest rates. They normally cater to persons who have exhausted all other possible credit solutions.

Since loan sharks work outside the legal framework, you have no guarantee that they will follow any of the rules that licensed lenders must adhere to, e.g. when it comes to changes in interest rate or how payments may be collected from the lender. Harassing or even physically attacking lenders that fall behind on their payments is not unheard of. Sometimes this treatment will extend to friends and family of the lender.

Loan sharks will often accept collateral that licensed lenders would refuse, such as the lender’s passport or driving license.

Sometimes loan sharks, when realizing that the lender is unable to repay the loan, will ask the lender to carry out tasks for them instead, e.g. stealing objects, engaging in prostitution or harass other lenders.

Loan sharks typically offer little or no paperwork, since they know that their loans are not enforceable in a court of law. In most countries, you can definitely not go to jail for not paying a loan shark even though they are often fond of threatening their borrowers with that. Keep in mind that in most countries, debtor’s prison do not exist, not even when someone has borrowed money from a licensed lender. Of course, if you let the loan shark bully you into committing crimes, then you could face jail for those crimes if they are serious enough, and loan sharks might hang on to incriminating evidence to increase their control over you.

The law varies from country to country, and sometimes also from state to state within the same country, but most jurisdictions do have laws against loan sharks. In addition to this, many actions are illegal in themselves, e.g. physical violence or trying to force someone to commit a crime.