Paying off debt early seems very relieving because you can save a lot of money. The early the loan you settle, the more money you will save. It will not only help you save money on interest, but you will also free up some space for your budget. Is that true for a bad credit loan?
Bad credit loans are expensive because they carry high-interest rates. Since a poor credit file increases the risk of default, lenders charge a high-interest rate. Like other loans, you can decide to pay off your loan early. Will you really save money, or it will save you no money?
It depends on the type of bad credit loans
There are commonly two types of bad credit loans in Ireland: payday loans and instalment loans. Payday loans are very small loans that are paid off in a lump sum. The repayment term of these loans does not exist for more than a period of two weeks, or sometimes it can go up to a month, depending on the policy of the lender.
These short-term loans can help you tide over financial emergencies like your laptop is crashed or your car needs an instant repair. On the other hand, instalment bad credit loans are repaid over months. The repayment length of these loans can vary between six months and one year.
Instalment loans can allow you to borrow a large amount of money, but you will have to secure your loan. You can secure these loans with a car or another valuable asset. However, note that the worth of the collateral must be more than the cost of the loan so the lender can recover money by liquidating it in case you make a default.
Small loans generally do not offer you any significant benefit, but instalment loans can help you improve your credit rating. Since you will be paying down the debt in fixed equal instalments, it will show that you are consistent with your repayment plan even when your financial condition fluctuates. The lender will inform credit reference agencies of your all timely payments.
Interest rate and APR
APR for bad credit loans can go up to 400%. However, it is lower for instalment loans. If you decide to pay off the payday loan before time, it will not save you any money at all. This is because the interest rate is charged as a flat fee. However, this is not the case with instalment loans. With these loans, interest accrues over time.
The longer the loan is outstanding, the more interest you will have to pay. The early the loan you settle, the less the money you will pay. This is why you should not bother much if you can pay off the instalment loan before the due date.
However, there is a catch. When you are paying off early, lenders are losing interest payments, which is their only source of profits. This is why they will cost you early payment fees. Your contract will have a mention of it.
It will not set you back much if you are paying off the debt too soon, but if the repayment term is about to end, it does not make sense because it will cost you more in total.
The total term of the debt
When you are taking out instalment bad credit loans, you should carefully check the loan term. Sometimes you choose a debt with a longer-term because it allows for small monthly repayments, and they are much more manageable.
However, you will pay much more as a total cost of the debt. You should carefully choose the repayment term. It should be neither too short nor too long. Use online loan calculators to check how much debt will cost you in total. You can flexibly choose the repayment length to get an idea of how the total cost varies.
Avoid loan rollover
If you are borrowing a small bad credit loan, you should try to avoid rollover. When you fall behind the repayment, the lender can rollover the loan, which means the debt payment can be extended for another two weeks. This will increase the total cost of the debt because of accrued interest and late payment fees.
Now you have understood whether you will save money or lose money if you pay off bad credit loans in Ireland.