In the world of bad credit loans, there are a few loan options available to someone with bad credit:
Payday Loans: Payday loans are short-term loans of usually 30 days, to be paid back on your next payday. The loan amounts are usually a few hundred pounds, and the interest rates/APR’s are very high, 1599% to over 2000%.
Rent-to-Own: Rent-to-own shops (RTO) and stores are also for those borrowers who may have bad credit, and are in need to purchase something. These shops sell the item on a rental basis, with the buyer/borrower paying weekly for the item.
Should the buyer/borrower not pay, the item can be taken back or repossessed.
The interest rates for RTO are high, and in the end a buyer may be paying almost double for the purchase, than if they were to buy the item outright.
The interest rates and fees for RTO are very high, and as we will see, RTO companies have been in the news and have come under fire lately for their practices.
Logbook Loans: Logbook loans are loans granted to someone who has a car of value, and the loan is against the car. The interest rates for these loans can be high, and if the borrower does not repay the loan, they could lose their car.
Each of these types of bad credit loans has a specific purpose, however, guarantor loans offer the most flexibility in the terms of how much one can borrow, and in the repayments, as the term can be as long as 60 months (5 years), making the loan more affordable.
RTO/Rent-to-Own in The News
A few years back, the FCA/Financial Conduct Authority, found that one RTO company did not disclose its fees “in a clear manner” and the company agreed to redress 59,000 customers to the tune of £900,000.
The FCA is the regulatory body that oversees all things credit and insurance, and other financial products.
Then just last year, the FCA imposed a price cap on what RTO companies can charge.
This is similar to the price and fee cap the FCA placed on payday loan lenders a few years back. For payday lenders, this change in fees and how they can roll over customer’s loans, caused over 40% of payday lenders to close up shop, including the largest payday lender, Wonga.
The changes the FCA imposed, made a huge change in how payday lenders could do business and make money, and the changes the FCA has imposed on RTO’s is also affecting them and how they can do business.
However, from a consumer or borrowing standpoint, you may think this is a good thing, those borrowers will bad credit and being vulnerable not being preyed upon by unscrupulous lenders.
And it does do this, but it also tightens up an avenue for those borrowers to get the credit they need.
The debate can and will continue.
In more recent news, RTO company Brighthouse has been trailing a new plan or programme for their customers, and began using “simple interest rather than compound” interest to calculate the interest on a loan.
Clients/customers will also now be required to have a bank account if they wish to use Brighthouse’s service.
The way the company is currently operating and the interest rates they charge, which can be 149%, means a borrower will pay back almost double what they borrow. Repayments of £500, will come to almost £1,000!
Many advise those seeking a bad credit loan, or who have bad credit to avoid RTO’s and to use them as a “last resort”.
The Founder of Moneycomms, Andrew Hagger stated, “I’d recommend that anyone thinking of signing up for a loan at 150 percent APR looks at the total amount they will have to repay on top of the amount they are borrowing – hopefully this will scare them and make them see financial sense.”
If we look at bad credit loans, and loans for those with no credit or poor credit, there are other options.
One of the better options is a guarantor loan. The loan terms are better, and the interest rates are much lower.