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Everyone has heard the old saying, "if it sounds too good to be true, it probably is". This is one of those times. Just like quick cash establishments and pay day loans, interest rates on these types of loans are very high.

In reality, most people who use these types of establishment are people who would have a harder time paying back a loan. Such as individuals with bad credit, those of low income, people living from paycheck to paycheck, or young adults with no credit will fall for this type of loan. It sounds so tempting, with exciting commercials targeted toward them.

It is a catch twenty two for the person who obtains the loan. The loan establishment will grant the consumer a loan for a very low monthly payment, spread out over an extended period of years at a very high interest rate. The consumer will think it sounds great, but the problem is that because the payments are so low and spread out for an extended number of years, that most of the money paid every month is just the interest, and only a few dollars goes toward the principal.

What ends up happening, that even though the consumer has paid on the loan for years, they will not make any leeway on the principal. This system allows the lender to make a bunch of money in the form of interest.

It is no longer any secret, that these types of establishments are being watched more closely than in the past, because of the high interest rates they charge. In general lenders will charge higher interest rates to consumers that are considered to have more risk and are more likely to default.

The no credit, no problem scam happens because these establishments target those who may be less likely to pay back a loan.

Sometimes they can make money, even if someone were to default on the loan. How does this happen? Typically, people will make payments for a few years before they default on the loan. During the time that payments were made, the company is making money in the form of interest payments. Remember, the borrower really isn't making any payment toward the principal. In the first few years of the loan the majority of the money paid only goes toward interest.

After a loan is defaulted, the merchandise that was purchased, for example, a car, would be repossessed. After repossession, the merchandise will be resold and the cycle will start over again.

Often the individual may still responsible for the debt, even though they do not have the merchandise.

To sum it up, if you are someone with no credit or bad credit and you have to obtain a loan from a "no credit, no problem" establishments, as with any loan, my advice is don't take a loan unless you really need too, always pay more than the payment due, and make sure to pay your bill on time. Your goal should be for you to get ahead, not the other way around.

Then no matter what type of loan you have, you are able to pay off the principal in less time. And paying more on your monthly bill will help reduce the amount of interest you pay.

Learn more about this author, Jeanie Pitner.
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