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5 Best Direct Lenders 🏆

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Finding a workable solution to alleviating debt when you have bad credit can feel impossible. Navigating high interest rates, loan terms, and making sure you can afford repayments throughout is stressful — to say the least.

This feeling is overwhelmingly felt by others in the current COVID-19 financial climate, with research showing the majority of Americans are struggling to minimize debt reduction.

The research also shows that 55% of us have some solid reasons behind this, including job loss and a lack of emergency savings. With no sign of this dissipating anytime soon, figuring out your best option to reduce debt is crucial.

Fortunately, there are legitimate loan options out there that can help alleviate your financial burden without ending up in a debt trap.

Installment loans for bad credit through direct lenders can be a lifeline for many right now. They offer flexibility and fair rates, and once they meet the recommendations set out by the financial regulators, they could be your best option.

In this review, we take you through the recommendations that aim to protect you. We also differentiate between installment loans and payday loans, and explain how exactly direct lenders work, but not before we highlight our top 6 installment loans for bad credit with direct lenders – sit tight!

Top Installment Loans for Bad Credit Borrowers


Here are our top six installment loans for bad credit:

1. Money Mutual
Best for Low Credit Scores
2. CashUSA.com
Best for Autopay & Online Payments
3. BadCreditLoans.com
Best for Getting Funds Fast
4. Check Into Cash
Best Minimum Loan Amount
5. Green Light Cash
Best for Flexibility
6. Lend You
Best for High Loan Amounts

1. MoneyMutual: Best for Low Credit Scores

Money Mutual
Money Mutual is trusted by over 2,000,000+ customers throughout the state

Pros

  • Funding time is quick
  • Various payment options to choose from
  • Good choice of short-term loans with lower upper limits

Cons

  • Unable to predict loan terms and interest rates
  • Limited availability in comparison to competitors

MoneyMutual is another online marketplace that connects borrowers with lenders throughout the country. To date, Money Mutual has connected over 2,000,000 consumers with short term loans. The lender makes it quick and easy for borrowers to get a cash advance of up to $2,500  in as little as 24 hours or less.

  • MIN Loan Amount: $250
  • MAX Loan Amount: $2,500
  • Terms: Varies by lender
  • Rates and fees: Varies by lender

Turnaround Time: 24 hours

MoneyMutual’s selling point, and why the platform was created, was to give customers quick access to cash. The MoneyMutual’s website lays out the reason for its existence, “While many loan options can be time consuming, MoneyMutual was founded to provide consumers a marketplace where they can find short term lenders quickly & easily!

Note: This lender is not available in NY or CT.

Similarly to LendYou’s process, potential borrowers can access cash in just three steps 1) Fill out a short form to give the lenders some information to work with, 2) The lenders will review the information instantly to determine if you’re a suitable candidate for a loan, 3) If a lender can make an offer and work with you, the funds can be deposited in your account in only 24 hours.

The marketplace is free to use. The marketplace earns its money through the lenders in that if a lender decides it would like to work with you, it will give Money Mutual a fee to connect with you. The marketplace won’t get any information that will allow it to compare or evaluate offers from lender to lender. 

For this reason, MoneyMutual advises you to review all offers to receive carefully to make sure it meets your needs and all the terms are fully understood before you agree to anything.

All-in-all, there are a number of pros and cons with MoneyMutual. It should be noted, that you will need to be earning a minimum of $800 per month to qualify. The good news is that those with

bad or fair credit are welcomed with open arms.


2. CashUSA.com: Best for Autopay and Online Payments

CashUSA
Cashusa offers borrowers autopay and online payment options

Pros

  • Diverse offers
  • Variation of options
  • Quick funding process
  • Good loan range
  • No additional fees from the platform

Cons

  • Not a direct lender
  • Stricter requirements
  • No live support chat

CashUSA is the final online lending platform to make our list of the best installment loans for bad credit. The lending portal offers borrowers the chance to secure a personal loan from $500 to $10,000. Loans can be repaid over the course of 90 days up to 72 months with APRs typically ranging from 5.99% to 35.99%, which is pretty standard.

If you have fair credit, you might be better off considering the top personal loans for fair credit. These usually have better rates and terms because the borrower has a higher credit score. 

  • MIN Loan Amount: $500
  • MAX Loan Amount: $10,000
  • Terms: 3 – 72 months
  • Rates and fees: 5.99% – 35.99%

Turnaround Time: 1 business day

The lending process with CashUSA is pretty clear and straightforward, but it also offers borrowers some additional benefits. 

First off, the loan request process is fast. Unlike loan applications to traditional banks, your online request will be processed quickly through CashUSA.

In fact, the loan request usually goes to lenders instantly. Considering some banks can take weeks to process a loan, it’s pretty impressive.

The CashUSA website is fully secure. The security of a website is a vital aspect for anyone looking to borrow online to consider. CashUSA uses extremely advanced encryption technology to keep all of your information in safe hands.

A key feature about CashUSA is how convenient it is to make payments. All of your payments can be made directly online. This means you won’t need to worry about late fees as a result of a delayed or lost payment. 

Additionally, CashUSA lenders allow you to set up autopayments for the utmost of convenience. With this, you won’t need to think about making your monthly loan payment ever again – it’s a fool proof way of keeping your repayments in good standing.

Most importantly, those with bad credit won’t be written off from getting a loan. People with bad, and even the worst credit score, can work with CashUSA, too. CashUSA is known as one of the premier bad credit loans with guaranteed approval out there, and is rated as number one in our review.


3. BadCreditLoans.com: Best for Getting Funds Fast

Bad Credit Loans
Badcreditloans offers borrowers with bad credit accessible loans

Pros

  • Extended repayment period
  • Fast cash
  • Low minimum amount

Cons

  • Higher interest rates
  • Additional fees

As the name suggests, BadCreditLoans helps connect people with bad credit to lenders in their time of need. The financial marketplace has been around since 1998, acting as an advocate for consumers and matching them with a network of lenders willing to front up the cash to people with bad credit.

  • MIN Loan Amount: $500
  • MAX Loan Amount: $5,000
  • Terms: 3-60 months
  • Rates and fees: 5.99% – 35.99%

Turnaround Time: 1 business day

The website also displays an in-depth, informative news section where you can keep an eye on the latest scams, best practices to help you improve your credit score, and an array of other contributions make BadCreditLoans an invaluable source of information for anyone in need of financial guidance.

Though Americans paid off $60 billion in debt before COVID-19, WalletHub now projects that Americans will take on $140 million in credit card debt throughout the rest of 2020. This debt will only add to the stress on those financially struggling.

If you have several different sources of debt, checking out the top debt consolidation loans could be your next best step. Debt consolidation loans offer an effective way to manage and streamline your debts or credit card payments, not to mention coming with several other advantages.

The APR offers with BadCreditLoans can reach up to 35.99% – this is almost double that of the average credit card. If your credit is particularly low, you could also be restricted to a lower loan limit.

To put the APR into perspective, let’s say you borrowed $1,000 at a rate of 35.99% and needed 36 months to repay it. You would pay $643 on interest alone.

However, to apply for a loan with BadCreditLoans you will need to provide some standard information like your name, address, and social security number. From there, a BadCreditLoans representative will put you in touch with a web of lenders where you can choose from an assortment of loans. 

If you agree to the terms of a loan you’re offered, you can authenticate the loan online, and potentially receive the loan the following business day.


4. Check Into Cash: Best Minimum Loan Amount

Check Into Cash
Check Into Cash offers borrowers a quick turnaround time and a low minimum loan amount

Pros

  • Minimum loan amount
  • Quick turnaround time

Cons

  • Payoff options are not transparent 

Founded in Tennessee in 1993, Check into cash has a long record of offering customers personal installment loans, Payday loans, title loans, and more all at affordable rates and convenient payment options.

Check Into Cash aims to help people that have been met with unexpected expenses, are in a money crunch between pay cheques, or for whatever reason, need some financial assistance over the short term.

  • MIN Loan Amount: $300
  • MAX Loan Amount: $1,500
  • Terms: Varies by state
  • Rates and fees: 261% to 782% APR
  • Turnaround Time: 1 business day

The small-dollar, short-term lender offers installment loans starting at just $300 and increasing to $1,500. That said, new customers can expect to borrow just $750, or whatever their state maximum is.

Unlike Money Mutual, Check Into Cash is a direct lender. The financial company offers short-term loans specifically for those with bad credit including installment loans, auto title loans, lines of credit, payday loans and flex loans.

The lender offers an extreme APR range starting at 261% and going all the way up to 782%. A particular downfall with this lender is that its payoff options are not very clear. After 27 years in the business, it could do better. 

Furthermore, you could be met with some additional fees if you need some more time to repay the loan. While there are a few fees you should be on top of, they vary by state and include insufficient fund fees and late fees. 

Though these rates are high, Check Into Cash offers accessible loans to those with bad credit. In March, five federal regulatory agencies released a joint statement recognizing the dire need for such lenders in the wake of COVID-19. 

The statement takes a balanced approach towards short-term loans, acknowledging that while there is a need to protect consumers, eliminating financial options that serve as a lifeline for many is not the solution. Instead it has enforced codifying principles for organizations to offer loans in a responsible manner.

For Check Into Cash customers in select states, those who make a late payment and get hit with some fees, will be offered an Extended Payment Plan. It’s not too far from the one Cash Central offers, but it incurs interest at the same rate until you’ve repaid the original amount and the additional fees.

The Check Into Cash process is quick, and customers can be connected with funds within one business day of applying. To apply, you’ll just need a few standard items including your driver’s license or photo ID, social security information, a bank statement or your checking number, bank routing number, and proof of address – all pretty straight forward.

To apply, you can fill out the form on their website which will take all of about five minutes. Then, a Check Into Cash representative will be on the phone to you in no time going through the application process with you.


5. Greenlight Cash: Best for Flexibility

GreenlightCash
Greenlight Cash is the most flexible marketplace for bad credit borrowers

Pros

  • Unrivaled flexibility and accessibility.
  • Predictable monthly payments
  • Quick and simplified borrowing process
  • Any credit is welcome

Greenlight Cash is an online platform that hooks consumers up with a web of reliable lenders throughout the country. In essence, the platform gives customers the green light for installment loans. 

This marketplace partners with a wide network of professionals, giving you the opportunity to team up with them and begin working on conquering your financial situation in an effective way. Just hit submit, and you’ll be one step closer to your funds.

  • MIN Loan Amount: $1,000
  • MAX Loan Amount: $5,000
  • Terms: Varies by lender
  • Rates and fees: 6.63% APR to 250% APR typically
  • Turnaround Time: 1-2 business day

Typically, installment loans come with an expansive range from 4.99% to 450%. Since GreenLightCash plays no part in the lending process itself, an accurate APR can’t be predicted. If you are suffering from credit card debt, we suggest you have a good understanding of how debt consolidation works before applying.

To apply for a loan with GreenLightCash just fill out a standard application form, get matched with a lender, and once you give the rates and terms the green light, you will get your money within 1-2 business days. 

Before applying, there are some eligibility criteria you’ll need to meet. These include being a U.S resident, being over 18, having a stable income, and being currently employed.

If you agree to the terms and conditions of the loan, you are entering into a contract to follow through on your side of the repayments. In the event that you don’t meet your payments on time, you might be required to pay some additional fees. Late payment fees will vary from lender to lender.


6. LendYou: Best for High Loan Amounts

Lendyou
LendYou offers borrowers high installment loan amounts of up to $15,000

Pros

  • High loan amounts of up to $15,000 
  • Minimal restrictions on the loan purpose
  • No collateral or guarantor needed

LendYou connects borrowers to lenders to help those looking for short term, unsecured loans. If you need some extra cash to help you with a large purchase, car payment or unexpected expense, LendYou offers a network that gives you options.

When you apply, your application will be sent to LendYou’s affiliate lenders. Should a lender think that you match their criteria for a loan, you could receive a loan offer.

  • MIN Loan Amount: $100
  • MAX Loan Amount: $35000
  • Terms: Varies by lender
  • Rates and fees: Starting at 4.99% APR
  • Turnaround Time: 1 business day

Loans are offered anywhere up to $15,000. The amount you receive will depend on the lender, your application, and your state.

Not only does LendYou offer installment loans, borrowers can access Payday loans and Personal loans too. The structure of the LendYou platform is set up to give you the opportunity to get the best loan rates and terms for you.

Keep in mind, as LendYou is not a lender, it doesn’t make any of the terms or credit decisions. If you’re struggling to make credit card payments, you could also check out the top 5 debt consolidation loans for bad credit borrowers. Debt consolidation will allow you to compile multiple credit card payments into one streamlined payment plan with lower interest rates.

That said, a highlight of this platform is that the whole process is quite fast and done in real time. In total, there are just three steps to take to secure a lons: 1) Online registration, 2) Offer received with loan terms and conditions, 3) If you agree with the loan terms, the money could be with you as soon as the next business day.

To be accepted for a loan, there are some approval requirements you must meet like being older than 18 years old, being a U.S citizen, having a valid checking or savings account with a direct deposit, and earning a minimum regular income of $1,000 per month.

So, why choose LendYou? 

To sum up, you could receive a loan of up to $15,000, there are minimal restrictions on how you chose to use the loan, you won’t need to tie any assets to the loan, and of course, those with bad credit who want guaranteed approval, should be okay with this lender.

Covid-19, the Poverty Line, & the Struggle to Minimize Debt

With hundreds of millions due to become unemployed, COVID-19 is having a disastrous impact on our socio-economic state.

Yet, Professor Philip Alston, a leading human rights expert recently released a five year tenure that has tied this more broadly to our political and human rights failures. Alston identifies the crisis the world is now facing as having five elements, the Covid-19 pandemic, extreme inequality, devastating climate change, a deep economic crisis, and a movement fighting racist systems throughout numerous countries. 

Essentially, Alston suggests that the poverty people are now facing has only been exacerbated by, not caused by, the pandemic.

Furthermore, a recent report released by the National Foundation for Credit Counseling (NFCC) and BAI on consumer spending in light of COVID-19, showed that 55% are struggling to repay their debt during the pandemic. 

With this, Americans are about to take on more than $140 billion in credit card debt. This shows that our struggle is bound in some complex factors that will not dissipate anytime soon. So, what can you do to help alleviate your financial distress?

Tips on Managing Debt

Here are our top five steps to helping you alleviate financial debt.

1.Create a budget and don’t diverge from it too much: Make sure you understand where all your money is going and then rank all your expenses including emergency fund contributions, and debt payments.

2. Create an emergency fund: One reason people get into debt is because they don’t have a fund for emergency situations. Try and save about 12 months of your income to have something to fall back on. 

3. Increase your credit score: Better credit will help you pay off your debt quicker. It can also help you find a place to live easier or find a job.

4. Repay your biggest debt first: Most of the time, if someone is in serious debt, they have multiple balances. In this case, paying off the biggest payment first is the best call. Alternatively, you could consider debt consolidation.

5. Evaluate your current job: It won’t matter how much you save or budget if you don’t have enough money. In this case, working out whether there are higher paying positions for someone with your experience or skills could be the best option.

A Buyer’s Guide to Installment Loans

In this guide, we are going to explain what exactly an installment loan is and how it works, how they differ from payday loans, and how direct lenders work, to name a few.

What is an Installment Loan?

An installment loan is an umbrella term that refers to the bulk of both commercial and personal loans extended to borrowers. With credit card transactions dropping as a result of COVID-19, it seems fitting that installment loans fill the niche. If this is the case, understanding how exactly installment loans work is a good place to start.

How Do Installment Loans Work?

Within this umbrella, an installment loan is a loan that is to be repaid with regularly scheduled payments or installments. For every payment made on an installment debt, a borrower will pay a portion of the principal amount borrowed, in addition to paying interest on the debt.

The amount repaid towards each regular loan payment is determined by some key variables including the initial loan amount received, the interest rate, and the length or time that the loan will take to be repaid, also known as the loan term. The regular payment amount also stays the same throughout the repayment period, making it easier for the borrower to budget to meet all required payments.

You should consider monitoring your credit to make sure that it doesn’t fall below where you expect it to be. Using a top credit monitoring service could go a long way when it comes to securing better loan terms and rates.

Installment Loans vs Payday Loans: Which is Better?

As we just outlined, installment loans cover the bulk of car loans, mortgages, and other personal loans, to be repaid over a longer term. They also generally require credit checks. 

On the other hand, payday loans have a much shorter payment term, with higher interest rates. No credit check is needed for this loan type. Here’s a brief explanation of both installment loans and payday loans.

Installment Loans

Installment loans can refer to a diverse range of loans – car loans, mortgages, boat loans – but the installment loans that can be compared to payday loans are usually categorized as personal loans.

With installment loans, you receive a lump sum straight up. Then, you repay a set amount of money each month of the agreed length of the loan term. The term range can be anywhere from 2 years to 30 years. Personal installment loans, however, tend to be about 12 months.

Installment loans can refer to a diverse range of loans – car loans, mortgages, boat loans – but the installment loans that can be compared to payday loans are usually categorized as personal loans.

With installment loans, you receive a lump sum straight up. Then, you repay a set amount of money each month of the agreed length of the loan term. The term range can be anywhere from 2 years to 30 years. Personal installment loans, however, tend to be about 12 months.

Legit personal installment loans conduct a credit check and a quite lengthy application process. You will usually get a much more favourable rate on a personal loan than you would on any payday loan.

Legit personal installment loans conduct a credit check and a quite lengthy application process. You will usually get a much more favourable rate on a personal loan than you would on any payday loan.

Payday Loans

Payday loans, on the other hand, are usually under $1,000 and are due on the borrowers next payday – and so derives the name. In most cases, a post-dated check is written, or access is given to the bank account to allow the lender to withdraw the funds automatically on the date your wage is due.

The issue arises with payday loans when you can’t keep up with repayments. While you will be allowed to push the loan back to your next payday, you will be charged an increased amount of interest. You’ll more than likely be met with some harsh late fees too.

In fact, fees are so harsh that they average around 400%. Not to forget, there are additional fees and penalties that come along with this.

This is compounded by the fact that under a new rule from the Consumer Financial Protection Bureau, Payday loan lenders won’t have to check whether borrowers can afford loans. Although the CFPB is positioning this as a way to make the marketplace more accessible, it is a rollback of a provision set in place by the Obama administration in 2017, which was created to protect consumers from taking out loans with expensive interest rates. With this new rule, lenders are no longer obligated to assess whether consumers will likely be able to repay the loan in the agreed time.

The most significant part to note about this is that if you fall behind on payments, the interest snowballs, leaving you in what we call a payday loan trap. Should you get stuck in one, you could find it hard to get out.

Key Benefits of Installment Loans

Collateral Loans vs. Non-Collateral Loans

Installments loans can come either with a collateral or non-collateral requirement. Mortgage loans, for example, require the house that the loan is being used to buy, as collateral. The collateral for a house is the house you buy with the loan.

Some installment loans (otherwise known as personal loans) can be extended without the need for collateral. These loans require the borrower to have a good credit score, and a proven ability to repay the loan based on their assets and/or income. 

Despite the economic and financial hardships caused by COVID-19, homeowners are remodelling their homes in droves. This likely means more people will be accessing non-collateralized, personal loans..

Unfortunately for these remodelers, personal loans, or loans that come without collateral, tend to have higher interest rates than collateralized loans, reflecting the increased risk attached should a lender not repay the loan. To help you get the best rates possible, learning how to understand your credit score correctly could be a life (or money, more accurately) saver.

What is the Installment Loan Process?

  1. Fill out an application
  2. Speak with the lender about available options
  3. Figure out what your best options are before agreeing to the loan

Here’s the breakdown for the process of applying for an installment loan. First, an application needs to be filled out with the lender, usually covering some standard questions such as what you want to use the loan for, like a boat. The lender will speak with the applicant and provide several options about the best solution to repaying a loan ie. the loan terms, payment amounts, and payment schedule.

For example, let’s consider someone who wants to get a loan of $10,000 to buy a car. The lender will let the borrower know that were they to make a bigger down payment, they could secure better interest rates, or perhaps a lower monthly payment by taking out a loan over a longer term. In addition, the lender will review the borrowers creditworthiness to help determine an acceptable loan amount and loan terms.

Ordinarily, the borrower retires the loan by making the agreed payments. Borrowers could potentially save on interest by paying off the loan early, before the end of the loan term. This isn’t always the case, however, and sometimes prepayment penalties can be charged for paying off the loan early.

Before going through the loan process, consider whether getting something removed from your credit report would help improve your credit score. This could help you secure better loan terms and rates.

Advantages and Disadvantages of an Installment Loan

So, what are the main advantages and disadvantages of an installment loan? Crucially, installment loans offer flexibility, and can be easily twisted and turned to meet your individual needs when it comes to the length of time you would like to repay the loan over.

Additionally, installment loans allow you to secure financing and a considerably lower interest rate that you would be able to with revolving credit financing, like credit cards. This way, you will have more cash to use for other reasons, as opposed to making one bigger cash expense.

When it comes to longer-term loans, a disadvantage might be that you are required to make payments on a  fixed-interest loan at an increased interest rate than the prevailing market rate.

Another key disadvantage of the installment loan stems from the obvious fact that you will be sealed into a long-term financial commitment.
In the future, circumstances might render you unable to meet the agreed payments any longer, possibly defaults, and forfeiture, and collateral that was tied to the loan. However, finding a top credit repair company could help improve your chances of getting better rates and being able to continue your repayment plan. solve these issues by increasing your credit score.

What Are Online Direct Lenders?

Marketplaces don’t directly fund your loan. Instead, you’ll complete an initial application on their website and a lender will be in touch if they think you are a suitable candidate. 

Online direct lenders, on the other hand, are financial institutions that fund your loan directly, once approved of course. These lenders comply with both state and federal laws. This means they are held accountable to the lending rules and regulations imposed by the relevant state/s.

How Do Online Loans From Direct Lenders Work?

When you apply for a loan with an online direct lender, all your interactions and communication will, more than likely, all be with one financial institution. This concerns the application process, the approval process, funding process, and repaying the loan.

When it comes to online direct lenders, the bulk of the process is done online. This makes loans more accessible and convenient, especially during a time of social distancing.

Summary

Installment loans can offer a welcome relief for many of us struggling to make ends meet throughout the COVID-19 pandemic. They come with several benefits includings, offering lower interest rates and flexibility. Though MoneyMutual is our best overall, each lender on our list offers different benefits therefore, we advise you conduct further research to establish the best option for your individual needs.

Although some short term loans can come with increased interest rates, regulatory agencies do recognize the benefits of these lenders for consumers in need. A recent survey highlighting those unable to pay as tax day arrival approaches, only serves to reinforce the need for short term lenders during the current economic and financial climate, so long as loans are offered in a responsible manner.

None-the-less, with lenders no longer being required to check whether you can afford to repay the loan, it is vital that you make your own calculations and assessments to avoid a long-term debt trap.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on TheTokenist.io. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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Bad Credit

How to Avoid a Prepayment Penalty When Paying Off a Loan | Pennyhoarder

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Look at you, so responsible. You received a financial windfall — stimulus check, tax refund, work bonus, inheritance, whatever — and you’re using it to pay off one of your debts years ahead of schedule.

Good for you! Except… make sure you don’t get charged a prepayment penalty.

Now wait just a minute, you say. I’m paying the money back early — early! — and my lender thanks me by charging me a fee?

Well, in some cases, yes.

A prepayment penalty is a fee lenders use to recoup the money they’ll lose when you’re no longer paying interest on the loan. That interest is how they make their money.

But you can avoid the trap — or at least a big payout if you’ve already signed the loan contract. We’ll explain.

What Is a Loan Prepayment Penalty?

A prepayment penalty is a fee lenders charge if you pay off all or part of your loan early.

Typically, a prepayment penalty only applies if you pay off the entire balance – for example, because you sold your car or are refinancing your mortgage – within a specific timeframe (usually within three years of when you accepted the loan).

In some cases, a prepayment penalty could apply if you pay off a large amount of your loan all at once.

Prepayment penalties do not normally apply if you pay extra principal in small chunks at a time, but it’s always a good idea to double check with the lender and your loan agreement.

What Loans Have Prepayment Penalties?

Most loans do not include a prepayment penalty. They are typically applied to larger loans, like mortgages and sometimes auto loans — although personal loans can also include this sneaky fee.

Credit unions and banks are your best options for avoiding loans that include prepayment penalties, according to Charles Gallagher, a consumer law attorney in St. Petersburg, Florida.

Unfortunately, if you have bad credit and can’t get a loan from traditional lenders, private loan alternatives are the most likely to include the prepayment penalty.

Pro Tip

If your loan includes a prepayment penalty, the contract should state the time period when it may be imposed, the maximum penalty and the lender’s contact information.

”The more opportunistic and less fair lenders would be the ones who would probably be assessing [prepayment penalties] as part of their loan terms,” he said, “I wouldn’t say loan sharking… but you have to search down the list for a less preferable lender.”

Prepayment Penalties for Mortgages

Although you’ll find prepayment penalties in auto and personal loans, a more common place to find them is in home loans. Why? Because a lender who agrees to a 30-year mortgage term is banking on earning years worth of interest to make money off the amount it’s loaning you.

That prepayment penalty can apply if you want to pay off your loan early, sell your house or even refinance, depending on the terms of your mortgage.

However, if there is a prepayment penalty in the contract for a more recent mortgage, there are rules about how long it can be in effect and how much you can owe.

The Consumer Financial Protection Bureau ruled that for mortgages made after Jan. 10, 2014, the maximum prepayment penalty a lender can charge is 2% of the loan balance. And prepayment penalties are only allowed in mortgages if all of the following are true:

  1. The loan has a fixed interest rate.
  2. The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
  3. The loan’s annual percentage rate can’t be higher than the Average Prime Offer Rate (also known as a higher-priced mortgage).

So suppose you bought a house last year and then wanted to sell your home. If your mortgage meets all of the above criteria and has a prepayment penalty clause in the mortgage contract, you could end up paying a penalty of 2% on the remaining balance — for a loan you still owe $200,000 on, that comes out to an extra $4,000.

Prepayment penalties apply for only the first few years of a mortgage — the CFPB’s rule allows for a maximum of three years. But again, check your mortgage agreement for your exact terms.

The prepayment penalty won’t apply to FHA, VA or USDA loans but can apply to conventional mortgages — although the penalty is much less common than it was before the CFPB’s ruling.

“It’s more of private loans — loans for people who’ve maybe had some struggles and can’t qualify for a Fannie or Freddie loan,” Gallagher said. “That block of lending is the one going to be most hit by this.”

How to Find Out If a Loan Will Have a Prepayment Penalty

The best way to avoid a prepayment penalty is to read your contract — or better yet, have a professional (like an attorney or CPA) who understands the terminology, review it.

“You should read the entirety of the loan, as painful as that sounds, because lenders may try to hide it,” Gallagher said. “Generally, it would be under repayment terms or the language that deals with the payoff of the loan or selling your house.”

Gallagher rattled off a list of alternative terms a lender could use in the contract, including:

  • Sale before a certain timeframe.
  • Refinance before a term.
  • Prepayment prior to maturity.

“They avoid using the word ‘penalty,’ obviously, because that would give a reader of the note, mortgage or the loan some alarm,” he said.

If you’re negotiating the terms — as say, with an auto loan — don’t let a salesperson try to pressure you into signing a contract without agreeing to a simple interest contract with no prepayment penalty. Better yet, start by applying for a pre-approved auto loan so you can get a pro to review any contracts before you sign.

Pro Tip

Do you have less-than-sterling credit? Watch out for pre-computed loans, in which interest is front-loaded, ensuring the lender collects more in interest no matter how quickly you pay off the loan.

If your lender presents you with a contract that includes a prepayment penalty, request a loan that does not include a prepayment penalty. The new contract may have other terms that make that loan less advantageous (like a higher interest rate), but you’ll at least be able to compare your options.

How Can You Find Out if Your Current Loan Has a Prepayment Penalty?

If a loan has a prepayment penalty, the servicer must include information about the penalty on either your monthly statement or in your loan coupon book (the slips of paper you send with your payment every month).

You can also ask your lender about the terms regarding your penalty by calling the number on your monthly billing statement or read the documents you signed when you closed the loan — look for the same terms mentioned above.

What to Do if You’re Stuck in a Loan With Prepayment Penalty

If you do discover that your loan includes a prepayment penalty, you still have some options.

First, check your contract.

If you’ll incur a fee for paying off your loan early within the first few years, consider holding onto the money until the penalty period expires.

Pro Tip

If you don’t have a loan with a prepayment penalty, contact your lender before sending additional money to ensure your payment is going toward principal — not interest or fees.

Additionally, although you may get socked with a penalty for paying off the loan balance early, it’s likely you can still make extra payments toward the balance. Review your contract or ask your lender what amount will trigger the penalty, Gallagher said.

If you’re paying off multiple types of debt, consider paying off the accounts that do not trigger prepayment penalties — credit cards and federal student loans don’t charge prepayment penalties.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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How Can I Prequalify for a Personal Loan? A Guide

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When you are in need of money quickly, you very likely don’t want to sit around pondering a bunch of different options. You want to find the option that works best for you and utilise it. Unfortunately for so many people around the country, it can be difficult to get their hands on the money they need due to them having a bad credit score, or even no credit score at all.

How Can I Prequalify for a Personal Loan?

Photo, Varun Gaba.

Your credit score is thought of as being pretty important, as it shows your financial trustworthiness to financial institutions like banks, credit card companies, lenders, and more. Your credit score is one thing that will usually be considered by just about any company you apply for a loan through, so keeping a close eye on your credit score is imperative for your financial life.

No matter what your credit score looks like, knowing how you can prequalify for a personal loan can be a comforting feeling when you are in need of quick cash. After all, when you are eligible for personal loan prequalification, you feel a little better going into the loan process knowing you won’t have to wait around for a loan decision.

How is Pre-qualification Decided? Prequalifying for a personal loan can depend on several different factors that you will have to keep in mind, and it will vary greatly depending on the lender you are applying through. Here are two of the things you will need to keep in mind when it comes to your loan that could affect whether or not you prequalify for the loan.

— Your credit score; Yes, this is always going to be something you are going to need to think about. Depending on the financial institution or lender you are going through, you can bet that your credit history and score will play a huge part in whether or not you prequalify.

— The amount of your loan; How much money you plan on borrowing from the lender or bank is also going to play a part in deciding whether or not you prequalify.

To get the most out of your search for a lender that you could prequalify with, think about applying with more than just one lender. This way, you might get several pre-qualification offers, and this will allow you to sort through the lenders and decide which one works best for you.

How Can I Prequalify for a Personal Loan?

Photo, Christina @ wocintechchat.com.

The Pre-qualification Process: No matter where you are trying to prequalify for your loan through, you will find the process to be pretty simple and largely similar across most lending platforms. You will need to provide some information to the lender that will help them decide whether or not to prequalify you.

How Can I Prequalify for a Personal Loan?

Photo, Windows.

Some of the information you will need to provide includes:

— Your full name; You will want to make sure you provide your full legal name so you can make the process simple for yourself and the lender. Depending on the lender, you might also be asked to provide images of your government issued ID or driver’s license to validate your identity.

— Your income and information on your job; Your income and employment status are often considered over your credit score when it comes to pre-qualification for loans, especially if you are applying for a personal loan through a lender who deals with customers with bad credit or no credit.

— The loan amount you want; Of course, you will have to include the amount of money you would like to borrow. Make sure it is something reasonable, and something that you can realistically pay back on time.

What Will the Lender Do? If you are trying to prequalify through a lender who specialises in bad credit clients, then you won’t have to worry about your credit score being negatively affected by taking out your loan. However, if the lender reports to the credit bureaus, your payments could still make an impact on your credit score.

If not working with a specialised lender, you might find that the lender will do a soft inquiry on your credit when going through the pre-qualification process. No worries here, as this doesn’t put any dents in your score. If you prequalify for the loan you are looking for, you should get an alert via email from the lender of your choice.

The Money You Need: Hopefully, you will have prequalified for the loan you are looking for so you can ensure you have access to the money you need, when you need it. Whether you’re going through some unexpected circumstance in life or just need money to pay something off quickly, knowing you are prequalified for the loan you need is a comforting feeling, allowing you access to the cash you need for whatever you need it for.



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