Getting bad credit loans has gotten easier and easier over the last few years. Though there was a window of time after the recession when credit companies stopped offering bad credit loans, by and large today just about anyone can get a quick cash infusion through bad credit lending companies.
But why is it that these companies can afford to give out bad credit loans? Aren’t they supposed to be risky?
One in Eight to One in Ten Default
In the cash advance industry, between one in eight to one in ten fail to pay back their loan on time. Of course quite a few people still manage to pay back their loan after they were late.
The key to being able to give money to lower credit score individuals is that the numbers work out for the lenders in the long run.
Let’s take the worst case scenario: One in eight default and nobody makes payments after being late. Let’s say that each loan is for $1,000 and the fee is $15 per $100.
That means that the lender is earning $150 per loan, but losing $1,000 every eight loans he makes. If you do the math, you’ll find that the lender took in a total of $1,200 in revenue, but lost $1,000.
As you can see, the cost of the payday loan recoups the cost of the lender losing his money. This is how the bad credit loans industry works: Some people pay back the money, some people default, but in the long run the credit companies make just enough to cover their expenses and make a little money.
What’s More Important Than Credit Score
Few payday loan companies today even check credit score anymore. Though credit scores may be a good indicator of how likely someone is to pay back a long term loan like a credit card or a mortgage, lenders have found that for short term loans there are other factors that make an even bigger difference.
Lenders for bad credit loans have essentially created their own system for determining how likely someone is to pay back their loan that doesn’t have anything to do with your credit score. Instead, it’s based primarily on what kind of job you have and how steady your income is. If you have a good, steady job with a decent income, you’ll probably be able to get a loan.