You need some money to cover unexpected costs. This is something that happens to everyone. You search for a loan online, find some great offers and then you get the following answer: ‘We are sorry, but your credit score is 10 points lower than our minimum requirement. You can get a payday loan with an APR of 400%.’ This is a really undesirable situation that many people have found themselves in.
The reason for writing this article is to explain one very interesting trend that we have seen over the last few years. The loan market is becoming much more flexible each day. Just a few years ago, many people have been in the aforementioned situation or very close to it. These days, lenders are much more open to giving loans to people that don’t have a perfect credit score.
Here is why this happens.
One obvious reason is that the loan business is very profitable, so the competition between lenders is becoming fierce. This makes lenders ready to make more compromises and give you a loan.
Another reason is that lenders started to realize that the old model, where your credit score is the only factor that determines the loan risk, is shortsighted. Credit score is still the primary factor, but these days lenders use many more factors to determine your risk. They look closely at your actual financial situation. Because what they care about is if you can repay the loan, not only what your credit score is. Things like work history, income, and even education, play a very important role for some companies.
Typically, there are 3 types of loans:
- Secured loans. With secured loans, you put something in a collateral and if you can’t pay the loan on time, the lenders can confiscate the collateral easily.
- Unsecured loans for great credit. These loans don’t require a collateral, but they require your credit score. In brief, you put your credit score in a collateral.
- Unsecured loans for bad or low credit. In this case, a problem can occur because you don’t have anything. No credit score and no collateral. In this case, many lenders won’t approve you, others will increase your APR and lower the amount that they will give you, explaining that you present a risk because of your financial situation. And this is the exact group of people that will benefit a lot from the flexibility of the loan market.
What does flexibility in the loan market actually mean?
More easily approved loans. These days, more people with a low and even bad credit score have chances to get personal loans. There are companies who have minimum credit score requirements and debt to income ratio, but these values are low. However, there are companies who don’t have such requirements. Many lenders will look at other factors too, not only your credit score.
Many more companies available. The number of lending companies is growing, so many more attractive offers will be available for you.
Lower APR. The competition between lenders is growing, therefore the offers will only be better and better.
Transparent contracts. How many of you have had a contract with hidden fees? More lenders means things will start to become more transparent.
Higher amounts. Lenders will start offering more money. Typically, people with bad credit are not approved or the amount that they receive is lower. But now, the amount that lenders give, even to people with a bad credit score, will be increased.
More niche lending companies. These days, there are many more niche companies. For example, companies that target only people with bad credit, companies that target only people like you, or people who do debt consolidation and so on.
What are alternative payday loans?
Payday loans are a very bad deal for almost everyone. The competitiveness on the lending market introduced something totally new in the lending business – alternative payday loans. Although many people comment that this is still not a great deal, we can’t hide the fact that they actually have many benefits against payday loans.
They are much more flexible than payday loans – you can expect more money, lower APR, better terms, no delay penalty fees, even a chance to postpone the payment with no consequences. These companies also offer people much better terms if they improve their financial situation. For example, if they see that you are paying the loan on time and increasing your credit score, they will start lowering your APR and increase the amount of the loan that you can get from them.
What about payday loans and auto title loans?
Although they are a bad deal, some people still use them. But we hope that the number of people who do this will start decreasing. One obvious reason for this is the law regulation. There are states where payday loans are completely illegal, and others where they are regulated by laws. The same goes for auto title loans. Here are payday and auto title loan laws by state.
How do payday lenders react to all this?
They almost don’t react. The only thing that we can mention is the new big change in payday loans – installment payday loans. If some of you see this as an improvement, it probably is. Some lenders started to offer people the same bad deals, but with better repayment terms. Payday loans are still offered in the same way – fast cash, no credit score – no problem, come and get your money right away. And in time, pay us our incredibly high APR. These loans are still a bad deal.
The competition between lenders leads to a more flexible loan market. This is a process that started a few years ago and according to many financial experts, it is likely to continue.