Bad Credit Loans: a Risk not Worth Taking Bad credit loans are offered to high-risk borrowers with a poor credit score, excessive debt, or history of late or missed payments. The problem with this type of financing is the high cost of borrowing. Customers are usually offered high interest rates and unfavorable terms which make repayment more difficult. Of course, the terms of a bad credit loan vary depending on whether you live in Montreal in Quebec, Edmonton in Alberta, Toronto in Ontario, or anywhere else. Risks for Borrowers with Bad Credit If you have maxed out your credit cards, been late on payments, filed for bankruptcy, or defaulted on loans, you are considered a risky borrower by financial institutions. Customers with poor credit have fewer options available, and their applications are often turned down. They usually apply with non-bank loan providers and are targeted by predatory lenders. The higher interest rates offered by sub-prime lenders translate into hundreds and thousands of dollars in interest charges. Borrowers who are already knee-deep in debt find it difficult to make regular payments. Being late on payments affects their credit score. While a missed payment won’t drop your score by 150 points, banks report late payments to the credit bureaus. Taking out a bad credit loan means higher monthly payments because banks usually offer shorter repayment terms to risky borrowers. The risk of default is higher when borrowers are unable to meet their monthly payments, either because of excessive interest or the monthly payment amount. Predatory Lenders and Loans for People with Bad Credit Some people also resort to payday loans because credit check is not required. While this is a type of short-term financing to cover urgent repairs or expenses, the interest rates are prohibitively high. Borrowers are charged high fees and are forced to renew through rollover plans. Other lenders offer very high overdraft and maintenance fees and single-premium credit insurance. They also use unfair practices such as: • Mandatory arbitration clauses • Balloon payments • Packing • Refinancing that results in higher interest rates and unfavorable terms • Loan flipping • Negative amortization • Hidden fees Borrowers with poor credit are often approached by loan sharks and predatory lenders. They charge high prepayment penalties and additional fees and fail to provide adequate information on the risks, costs, penalties, refinancing options, and other terms. Bad credit loans and services to avoid include non-bank checks, car title and subprime mortgage loans, refund participation loans, and rent-to-own agreements. Under rent-to-own agreements, property such as household appliances, electronics, TV and computers, and furniture is leased. These transactions are risky in that the item can be repossessed by the store. Overdraft protection offers should be avoided as well. Loan sharks also target borrowers with poor credit and use illegal lending practices, including threats of violence and blackmailing. Debt slavery or bondage is an extreme form whereby the borrower pledges his labor to secure financing. Alternatives Applying for a bad credit loan in Vancouver in British Columbia, Calgary in Alberta, Winnipeg in Manitoba, or Toronto in Ontario is a good idea only if the money is used to repay high interest debt such as credit cards and title loans. There are better alternatives, however. Debt consolidation and balance transfers are two options that allow borrowers to lower their monthly payments and interest charges. Many card issuers offer zero introductory rates and balance transfer cards that can be used for debt consolidation. The terms and rates vary depending on whether your provider is a local bank or a big financial institution with branches in the major Canadian cities.