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High Interest Rates Are Not the Only Concern
Many people apply for loans through finance companies when
they have been denied a loan at a major bank or credit union.
Finance companies provide lending options for those that find
themselves left out of conventional lending.
One of the biggest downfalls with finance company loans is
the exceedingly high interest that is charged on may of their
loan products. Indeed, finance companies loans will generally
cost you dearly. Many of their loans are marketed as ways to
consolidate high interest credit card debt. The problem is that
the interest rate on the loan is frequently as high as the
interest charged on the credit card accounts.
Still, finance company loans are easier to obtain than many
traditional bank loans. If you have no credit or have bad
credit, then these loans may be one of your most feasible
options. After all, these loans are designed around people left
out by the prime lending market.
Credit Impact
If you have successfully repaid a finance company loan
without any missed or late payments, you likely expect that your
credit score will have gone up substantially. However, this is
not necessarily the case.
Credit scoring does not give the same weight to finance
company loans as they would a loan through a traditional lender.
Finance companies are sometimes referred to as fringe banking
centers. They are a sign that you were not eligible for prime
lending options.
In fact, many bankers will tell you that finance company
loans may actually lower your score, even if you have a perfect
repayment record with them. If you have a solid credit history,
then you should actually avoid finance companies as it could
impact your credit score in a negative manner.
If you have damaged credit, then a finance company loan might
be a more reasonable option for you. Evaluate what the costs of
the loan are and whether you feel you can gain approval through
a traditional lender. If this is your best option, then you can
still benefit from some limited credit history gains.
As with any loan, make sure that you repay it on-time. Just
one late payment can cause the entire account to be listed as a
negative account on your credit profile. Additional late
payments can further erode an already damaged credit rating.
When you are denied access to mainstream lending, then
finance companies may be a reasonable option. Just make sure
that you are dealing with a reputable company that is well
established in your community.
Also, determine if the loan you are applying for is for a
necessity. If you are paying a higher rate, then it makes sense
to limit your purchases to only what is necessary. Is it worth
the cost of the loan to obtain the item that you are buying? If
not, focus on improving your credit score so that you have
better credit options in the future. |
