If you have bad credit and someone comes along and tells you that they want to give you money, that can probably come off as too good to be true. In some cases that’s the case – but that’s the exception rather than the rule. By and large, bad credit payday loans are an everyday occurrence. You can get a loan for the amount you need, regardless of your credit.
Why Credit Scores Matter to Traditional Lenders
Your credit rating is a composite of all the various things you’ve done or haven’t done in your credit history.
Using the FICO system, credit reports pull data from the three credit bureaus, Experian, TransUnion and Equifax. They then turn historical facts – Such as how much you’ve borrowed, any time you’ve been late on payments, the percent of your cards that you’ve used – And turn it into a number.
The actual formula for calculating the number is a trade secret. However, the number is supposed to give lenders an easy to use gauge of how likely someone is to pay back a loan.
Of course, people will high credit scores still default on loans; and people with poor credit still often pay back their loans. The credit score is simply FICO’s best guess as to how likely you are to repay your debts.
Why Most Lenders Avoid Low Credit Borrowers
The main reason lenders avoid low credit borrowers isn’t because they think they’ll default. It’s because they’re not able to cover the cost of that default with the money they earn from interest rates.
If lenders were able to charge the interest rates necessary to cover the costs of lending to low credit score borrowers, then most credit card companies will do so. However, because lending laws limit what creditors can and cannot charge, they often can’t recoup the money on the low credit score end of the spectrum.
Why Bad Credit Payday Loans Are Different
Payday loans on the other hand are a completely different animal. Though defaults still cost lenders money, the $15 per $100 (average) they earn is enough for them to recoup the cost of defaults and make a little bit of money.
As a result, bad credit payday loans work for both the lender and the borrower. Lenders are willing to take on the risk of lending money to low credit individuals, because in the long run they still make money.
To make a long story short, it’s not too good to be true. It makes business sense for the lenders to give money to low credit borrowers. If you need bad credit payday loans, there are lenders out there who want to lend you money.