Why are there only high interest loans for bad credit?

When applying for a loan your credit history, or "credit score", is taken into account. Whilst most people think low interest rates for people with good credit exists as a "reward" for making timely payments over the years, this isn't the sole reason high interest loans exist for bad credit.

A loan company judges a customer as either "high risk" or "low risk" depending on their credit score. A high risk customer is less likely to pay a loan back, which is reflected by missed payments and defaults on their credit profile. A low risk customer has timely payments, no defaults and an admirable lending history, with little risk of not repaying the loan. This method of credit scoring allows lenders to judge your lender habits and your reliability, but they don't always accept everyone with a perfect credit score; customers who miss payments every so often incur more charges, resulting in more money for the lender. You could be more likely to get a loan with a few small missed payments than having a perfect history.

High interest loans for people with bad credit is a way of "insuring" the lender against risky customers. By offering higher APR the borrower is likely to repay the loan in the first couple of payments (you'll notice that the high APR normally results in a repayment of twice the original amount). So, if the lender does eventually default on the repayment, the company doesn't lose too much money.

Another ploy for using high interest loans for people with bad credit is to incur more charges upon default. Once the loan is defaulted more interest can be charged, including extra charges and fees. Because the loan is high interest the lender can easily add ridiculous fees to the overall amount, based on the original APR. If you ever apply for a high interest loan for people with bad credit and default on the loan, keep a close eye on the fees they add. No company is allowed to unjustly add expensive fees to the amount without good reason and you can dispute this in court if you feel the extra amount added is completely unrealistic.

To avoid high interest loans for people with bad credit, look for specific lenders who lend to bad credit people. Government loans (i.e., crisis loans) can also be a good source of finance, or guarantor loans which offer a considerably cheaper APR rate.

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