The process of getting a loan can be complex and daunting, even more so if you have bad credit.
That’s why we’ve written this short but comprehensive guide that goes into the main things you should know when pursuing a loan. You’ll find out how bad credit affects lending, where to get bad credit loans, and the best loan types, including personal loans for bad credit.
First, you should understand the credit system and how it may affect your lending. It’s quite simple, lenders will check your score when they process your loan application, and the score determines whether they accept it and what terms they offer. For example, bad credit borrowers will typically have to contend with higher interest rates.
If you have a lower credit score, you may have missed payments toward other debts in the past, so lending money to you is a risk. That’s why lenders are less likely to give loans to bad credit borrowers when many borrowers with good credit scores are waiting in line.
According to FICO, a fair credit score is typically below 670 and a bad score is below 580. Most borrowers should aim to have more than 670, so they’re in the “good” category.
You can get bad credit loans from many places but, if you can’t get a loan in the typical places, there are popular alternatives.
First, it helps to be a member of a credit union. Credit unions consider a member’s history in applications, which can cancel out a bad credit score, but you need to have already been a member with them.
Otherwise, you’ll have better luck with online lenders. The Internet has led to many businesses that lend money, though not all of them are worth your time and money. While online lenders can get money to you fast, be wary of predatory practices and hidden fees with some services. Many good faith lenders also have guides on increasing your credit score, which is something they can help with.
To avoid bad faith lenders, make sure you go with a lender that doesn’t ask for your financial information (as in, information that could be used to make a transaction). While there are origination fees tied to lending, they should be scraped from your loan amount and not taken directly from your checking account.
Compare loans before deciding on them to get the most favorable terms. When scouting out loan opportunities, stay away from loans that offer no credit checks. If the lender isn’t doing a credit check, they’re not concerned about you paying it back, and that is a bad thing. With bad faith lenders, it’s often because they want to trap customers in a cycle of debt.
So, what types of loans are best for bad credit?
You’ll have difficulty getting certain advanced loans, like business-related options, with bad credit. The best loans are personal loans that apply to you as an individual.
Personal loans come in two main types – unsecured and secured. Unsecured loans are what most of us imagine when we think about getting a loan. It is where the lender processes your application, finds you suitable, and pays you your asking amount. To get these with bad credit, you may need to get a co-signer to your loan but getting an unsecured personal loan will still be difficult.
In contrast, a secured loan is where the lender will process your application, have concerns, and ask you to put up collateral before they give you the loan. Collateral are assets that the lender will seize if you cannot pay. Many loans, like auto loans, are based on putting your assets on the line and then paying them off.
Secured loans tend to have lower interest rates but, if you’re unsure of your ability to make payments, you will need to be very careful when pursuing them.
If you have bad credit, you may already have debt that’s bearing down on you. If that’s the case, you should consider debt consolidation. This is where you take multiple debts and combine them into a single loan that’s paid with one payment.
Not only is this less stressful for many borrowers, but you can also reduce the monthly cost and negotiate a more favorable interest rate. With these benefits, the loan can become more manageable and you can pay it off and increase your credit score in the process.
These are the fundamentals that you need to know when pursuing a bad credit loan. If you find the right loan from the right lender, you can borrow money just like anybody else, despite your poor credit score.