Picture a scenario. You have taken out a debt and when the repayment date falls, you fail to pay it off. When you fall behind repayment, you end up paying late payment fees and interest penalties. This cycle continues to run, and eventually you end up with a predatory debt spiral.
When you borrow money, not only will you pay back the principal amount, but you will also pay interest on top of it. Interest rates are likely to be a bit higher if you take out very bad credit loans with no guarantor. Lenders charge no broker fee, which is why everyone applies for these loans, but you cannot afford to ignore your repayment capacity.
Note that checking your credit and checking your repayment ability are not the same thing. The former requires you to ensure that your credit report does not consist of an error that pulls your credit score. The poorer the credit score, the lower the chances of getting affordable deals. Going through your credit file before applying for the loan can help you avoid shocking surprises.
Having a stellar credit rating does not ensure that you can afford to pay off the debt. Before understanding of the repayment ability, you need to understand how bad credit loans work.
Bad credit loans are short-term loans, with average repayment period of not more than a month. These loans require lump sum payments. For instance, if you borrowed £300 for a period of 30 days at 0.8%, you will have to pay off £24 for every £100 borrowed. It means as the term of the loan expires, you will end up paying £372.
Some bad credit loans also come with instalment feature, but the amount needs to be higher. Whether you will pay off the debt in lump sum and instalments, you must consider your repayment affordability. Here is how you can do it.
Find your credit needs
First off, you need to determine your credit needs. Suppose you need to buy a coffee machine that costs £150. Since you can easily apply for bad credit loans, it does not mean that you will borrow the whole cost of the machine. Remember that these loans aim at helping you tide over.
You should check your savings. If you have enough money to buy a coffee machine, you do not need to borrow money. If your savings fall short of cash, for instance, by £100, you should borrow only £100.
Most people tempt to borrow more than their needs and this is where they slip up. Further, you need to consider the urgency. Try to put it off as long as you can do it.
Create a budget
Once you have identified your credit needs, the next step is creating a budget. Look over your monthly incomings and outgoings. Do not forget to include even a tiny expense. Make sure that your incomings are greater than your outgoings.
Having a positive net worth is a must because the money you have left after meeting all of your regular expenses will be utilised to pay off the debt. If your net worth gets zero, you should avoid taking out a loan.
If you have an emergency, you should seek financial assistance from your friends and family. This is a better option than a loan because you will be not paying interest.
Make a repayment plan
The next step is to create a repayment plan. Even if you need to repay the debt in lump sum, you should set aside money so that you do not fall behind repayment when the due date approaches.
Find a lender who checks your repayment ability
When you borrow money, make sure that you take out a loan with a lender who looks over your repayment potential. A reputable lender always peruses your income statement to determine whether you will be able to pay off the debt after meeting all of your regular expenses. Make sure that the money you borrow is to be paid in instalments. This makes the loan affordable.
The bottom line
It is important that you check your repayment capacity before borrowing money. Otherwise, there is always a huge risk of falling into a debt trap. Even if your credit rating is good, make sure that you apply for a loan with a lender who goes through your affordability.