Bad credit loans should just be called bad loans.
Even if your finances are rock-solid, you've probably noticed the advertisements suggesting that if you have bad credit, Company X will be happy to give you a loan.
And unless you're young and not yet jaded, you know that accepting a loan from Company X isn't smart.
But if you're desperate enough, you might take one out anyway. You might feel that if a company is dumb enough to loan you money despite your bad credit, it's better to take the money and ask questions later. But it's actually better to ask questions now. Here are some common bad credit loans -- and why it's better to stay away.
Automobile loans for consumers with bad credit. If the interest rate is in the double digits and the time period you have to pay off the car is longer than four or five years, this is not a good deal.
Katie Moore, a Detroit-based counselor with GreenPath Debt Solutions, a nationwide nonprofit that helps consumers with debt and bankruptcy, says she recently worked with a woman who took out a loan to finance a car. The monthly payment for the $15,000 used car was $300, which the woman felt was manageable, but the interest rate was 18 percent -- for the next 84 months.
The salesman told her that after a couple years of paying on time, she could refinance.
The salesman was full of it.
"The vehicle is going to depreciate much faster than it is paid off," Moore says. "It's very difficult to get a new finance company to refinance that loan even if you have improved your credit because the vehicle is not worth what you owe."
So assuming Moore's client doesn't get her car refinanced, after 84 months, "the client will have paid over $26,000 for the vehicle," Moore says.
And if you're buying a used car, it may not last seven years -- or by then, it may be at the mechanic every other month.
According to Kelley Blue Book, the average length someone owns a used car is 49.9 months, says Kimberly Allen, a Williamsburg, Virginia-based counselor with ClearPoint Credit Counseling Solutions, a debt and credit counseling nonprofit.
"If your loan is going to outlive how long you plan to keep a car, then [the loan] is a never-ending cycle," Allen says.
Payday loans. Payday loans are illegal in some states, and the rules vary in others. But the gist of these loans is that as long as you can show proof of income, lenders offer you a small loan -- usually anywhere from $100 to $1,000 -- with interest. If you take out a $400 loan, two weeks later, you may owe $460.
Usually after two weeks, you'll owe the payday lending store $460, which could be a problem if your paycheck is, say, $600 -- and you have $500 in bills that need to be paid. What frequently happens is that the borrower gives the payday lender $460, leaving the borrower with $140 to stretch until the next paycheck. Then, flustered, the borrower may take out another payday loan for $400 or $500. And the cycle of debt continues or worsens.
"Those aren't 'temporary' loans to fix a short-term crisis as they advertise, but can be unending nightmares," Allen says.
Auto title loans. "It's a disaster waiting to happen," says Bruce McClary, a certified financial educator at ClearPoint Credit Counseling Solutions.
Auto title loans are advertised in storefronts and online. You're given a loan of several thousand dollars or so with the promise that if you can't pay it back, you'll give them your car.
"I worked with a family who was paying 89 percent interest," says Robert Semrad, a bankruptcy attorney based in Chicago who owns DebtStoppers bankruptcy law firm. Even worse, he says the car was almost paid off, and by the time the family came to him, they could barely remember what they used the money for.
Mobile home loans. If you can't get a mortgage and hate apartment life, you might consider steering in this direction. Think long and hard.
Mary Ellen Nicol, a certified credit counselor with ClearPoint in Atlanta, says, "Almost every mobile home loan I've seen is a bad loan. I've talked with mobile home loan clients with rates as high as 19 percent for 20 years, which is very typical and makes them much more expensive than a 30-year loan at a standard prime interest rate."
Which, of course, is what you'd typically get if you bought a house. But with a mobile home, "there's virtually no way to refinance because they lose value so fast. In some cases, they're written similarly to a car loan with no protection against foreclosure since the lender can repossess it," Nicol says.
Quick personal loans to people with bad credit. Many subprime lenders will lend you money -- often several thousand dollars -- if you pass a quick credit check.
They tend to look for people with spotty to bad credit but with decent odds of being able to pay the loan back. After all, these companies want to make money.
And they want to make a lot of it, says McClary, who spent five years working for two subprime lenders before changing teams and trying to help people get out from under the crushing debt of these loans.
A person might borrow $5,000, but the interest would come out to $5,800, McClary says, adding, in case you didn't notice: "The interest would be more than what they borrowed."
It gets worse. McClary says he and other salespeople were encouraged to recommend to consumers that they buy credit life insurance and credit disability insurance, designed to pay off the debt if they died or become disabled.
"It would increase the profit margin on the loan, usually costing $15 a month," McClary says, adding that that actually raised the 36 annual percentage rate of the loan to closer to 60 percent.
Ominously, this type of insurance doesn't look out for the cardholder -- it looks out for the lender who wants financial compensation should something happen to you.
McClary says it's important to find out everything you can about your credit history and the loan you're applying for -- especially if you have bad credit. "If you are uninformed and walk into the office of the lender, then God help you," McClary says. "Their job isn't to educate you while selling a product. Their job is only to sell you the product."
[See: 10 Easy Ways to Pay Off Debt .]
And you could be in danger if you take out a bad credit loan after bankruptcy, Semrad warns. Lenders know you no longer owe a ton of money and can probably pay back a loan. But what if you can't? Your terms are still likely to be onerous, after all.
Evan Hutchinson, a business consultant in Ames, Iowa, says he had a Wisconsin-based colleague who got a loan through a peer lending website after a bankruptcy.
"He was approved for an amount up to 25 percent at a 36 percent APR for five or seven years," Hutchinson says, adding that his friend couldn't make the payments and couldn't declare bankruptcy since he had recently filed.
"It ruined him financially again," Hutchinson says.
Which is to be expected. These types of loans are marketed as a way to help the poor. But as a rule, bad credit loans don't help the poor -- they make people poor.