Which Loans for Bad Credit Should You Choose?
Credit can be described as the trust businesses have that a borrowed will repay the amount owed. You can have either a good credit or a bad credit. Discussed in this post is what it means to have a poor credit score, the loan options available for such cases, and what you can do change your credit history.
What Is Bad Credit?
This is the past failures to comply with credit agreements, which then results in the inability for you to be approved for new credit. Bad credit means that you are yet to pay previous credit obligations in a timely manner, in case you have paid them at all.
The credit history is recorded by credit bureaus, which then create your credit score report. In case of multiple cases of negative feedback on your report translates to a bad credit. Among the data sent to the credit bureau and which affects your credit score include, filed bankruptcy, charge high balances, or even vehicle repossessed. A poor credit score will occur when any of these things occur severally but not a single time.
The information on the report is then used to calculate the credit score that is represented in the numerical digits at any given time. This numerical figure range from 300 to 850 whereby a lower score is ultimately translated into bad credit.
Effects of Bad Credit
Once you have a poor credit score, lenders will be less likely to approve your credit request since you are likely to fall behind on the loan given. As such, your loan application is then denied. If you are fortunate enough to get approved, chances are you will end up paying a significantly higher interested rates compared to a borrower with clean credit score. The high rates are a way for the lender to compensate for the risk of lending to you.
Poor credit score affects much more than just the credit card, loan approval and the interest rates. Chances are your insurer will use the credit score to determine the insurance rate. In addition, utility and cell phone providers may be forced to charge you a security deposit due to your bad credit. Your proprietor too may have to charge you a higher security deposit in case you have a poor credit, or they are even likely to turn you down all together.
Do you have a bad credit?
If you keep tabs on your finances, chances are you have an idea of where your credit score lies. You know the payments you have missed so far or the large credit card balance that is eating you up. In case you recent loan application was turned down, interests went through the roof, or the credit card issuers has lowered your limit, these are some of the signals indicating a bad credit score.
To find out where your credit score lies, the easiest way is to check with the credit bureau. Keep in mind that there is no standard cut off between good and poor credit score but is your credit score report ranks you below 620, and then you are on the poor credit side.
In most cases, you can easily tell what is negatively affecting your credit score but simply checking your credit report, which you are entitled to. You do not have to pay to check what is hurting your bad credit.
In case you are dealing with a bad credit, it does not last a lifetime. There are several steps you can take to improve your credit score. To begin with, you should focus your effort on getting rid of the negative information from the credit report by disputing the credit report, or repair techniques. After that, strive to add more positive information to the report by adding more accounts and making timely payments.
Perils of a bad Credit score
As you continue to score high in your credit card, you might not be aware of the fact that this is equally affecting your credit card. Your credit card payments as well as the level of debt will have the main impact on the credit score. Should you mess in any of these areas, you can expect your credit score to plummet.
If you have never suffered the full effect of a bad credit score, you might be tempted to wonder why there is so much fuss about it. Considering the fact that business judge you based on the figure on your credit score report, a bad credit will without a doubt makes your life unbearably hard. Securing a job and a place to live will be among the challenges that await you. Below are some of the perils associated with bad credit.
1. High interest rates on loans and credit cards
Creditors and creditors will consider you as a high-risk applicant than those with better scores. Due to this risk, they will tend to charge you significantly higher rates. As results, you are likely to end up paying significantly more than you would have with a good credit and suitable interest rates. In case of you have an outstanding credit card balance or a big loan, you are likely to end up paying much higher interest rates.
2. Credit and loan applications denied
Since the creditors and lenders see your poor record as a risk, chances are they will be reluctant to lend you to at all. Bad credit will see your credit applications denied.
3. Challenges getting an apartment approval
If you though landlords do not check your credit record, they use this information to decide whether or not to allow you to enter into a lease agreement. With a bad credit history, you will have a hard time securing a place to stay.
4. Security deposit for utilities
Most utility companies such as cable, electricity and phone companies will refer to your credit score before approving your application. In case you have a poor record, you might be required to make a security deposit to qualify for the service regardless of whether or not you pay your bills on time. The security deposit is usually charged upfront before the service can be established in your name.
5. Denied phone contract
Yes, your cell phone company checks your credit score to decide whether to extend their services to you. They need to know how reliable your payments are likely to be. In case you have a bad credit, you are likely to have a prepaid cell phone on monthly basis, which tends to be more expensive. If leasing or making payments using your cell phone, expect it to be significantly higher especially if you have a bad credit score.
6. Denied employment opportunity
If you are applying for certain jobs such as those in finance industry and upper management levels, a good credit score is among the requirements for the job. With a poor credit score, chances are you will be turned down for the job due to the negative bit on your credit report. This is obvious, especially when you have a high outstanding loan or bankruptcy. Keep in mind that, employers usually check the credit report and not the score. This is because they are not checking for the poor credit but the items likely to affect your performance.
7. Higher Insurance Premium
As indicated above, your insurer also check your credit. The argument is that low credit scores are associated with higher claim filed. This is because, by checking your credit, they charge significantly higher premium rates to people with low score regardless of the claims filed.
8. Regular calls from creditors
Bad credit is not to blame for these frequent calls from debt collectors. However, it is highly likely that you will have a few pending bills that these debt collectors are after.
9. Difficulty starting a business
To start a business you will need a loan probably from a bank to finance your start up. With a bad credit history, it is likely to limit the amount you intend to borrow to finance your business regardless of the idea you have.
10. Difficulties in buying a car
Given the fact that banks check reports before approving your car loan request, it is likely that you will be denied of get approved at extremely high interest rates. Car loans without credit check usually results in seriously high rate making the monthly repayments almost impossible.
Signs that you need to repair your credit score
Are you dealing with bad credit? Do you suspect that your credit score is probably not the best? Discussed below signs that your credit need repair.
- 1. Denied credit card
If you recently have a credit card application rejected, this could be an indication that you credit is in need of repair. Your credit card supplier will provide you with an adverse action notice informing you of the reasons why your credit card application was rejected. If the rejection is due to information in the credit report, you can get a free copy of the report.
- 2. Electricity account under someone else’s name
Most businesses, including utility services are usually check your credit report. Before extending their services to you. When unable to establish a utility account under your name, then you need to repair your credit. Check the credit report to identify the negative items that are affecting your credit score.
- 3. No one willing to co-sign your loan
When dealing with bad credit, it is likely that your will have a hard time getting your loan request approved on your own. In this case, you are also unlikely to get your loved one to co-sign the application for you. If that is the case, then you badly need to repair your credit. With a good credit score, you do not need anyone to help you get a loan.
Bad Credit Loans
Bad credit loans refer to loan design for people with a bad credit. There are numerous reasons why you might be dealing with a bad credit, which ranges from being unable to stick with payment on earlier credit agreement among others. A person who has never had a loan or a credit card before is likely to have a bad credit given the fact that lenders do not have the evidence need to prove that you are in a position to manage the borrowed amount successfully.
In fact, it is almost impossible for you to borrow from a bank or any other mainstream lender with a bad credit. This explains why there are special loan options available for individuals with bad credit.
The key advantage of the bad credit loan is that you can actually borrow money something that would not have been possible with a poor credit history. This comes as a great opportunity for folks who need to make major purchase or planning to consolidate other debts.
Another benefit that comes with loans for bad credit is that it helps to repair the current negative credit status. This is due to the fact that, provided you make the necessary payments within the stipulated time, you prove that you are now able to manage your money much better.
However, there is a catch. One of the biggest setbacks associated with loans for bad credit is that the interest rate is extremely high compared to that of the standard loans. Since you already had a hard time managing credit before, you represent a higher risk to lenders and as such, the rates tend to be much higher than they would with a good credit record.
A few things to keep in mind when applying for loan with bad credit
Loans for bad credit can be either unsecured or secured. Unsecure loans for bad credit means that the lender has zero claim to any of your property should you fail to repay the loan. On the other hand, a secured loan is secured against your property or assets.
If you go for the secured loan, although you are likely to pay lower interest rates, you risk losing your property should you fail to keep up with the repayment. When choosing how long to repay the loan, keep in mind that, if your settle for a longer repayment term, the interest will be much higher that if you intend to pay off much faster.
You should also keep in mind that the interest rates are tiered based on the amount borrowed. The rates tend to be lower with as your borrow more. As such, if you borrow low, you might consider borrowing a bit more to enjoy the lower rates. However, you should avoid borrowing more that you are able to pay.
Pros and Cons of Loans for Bad Credit
If you are fortunate enough to find loan for bad credit that you are confident, enough you will successfully repay it can help to rebuild your credit rating. This is due to the fact that it helps you to prove to lenders that you can manage your finances responsibly and therefore, repaying the amount borrowed in a timely manner.
People who have had challenges consolidating debts can benefit from bad credit. However, if this is what you intend to do, keep in mind that there are other budget alternative some that are discussed below.
Determine the ideal loans for you
There are several types of loans meant for people with bad credit. As such, it is important that you do your homework to ensure that you choose the best loan for your needs. It is also advisable to compared different debt consolidation loan if you find them ideal for you.
Types of Loans for Bad Credit
You might be tempted to think that due to your bad credit, you do not qualify for a loan. Fortunately, this is not true entirely true. In fact, there are several types of loans for bad credit available to you. You are also likely to get other conventional loans, home, auto, and personals loans set for bad credit.
However, the terms are likely to be a bit harder to cope with, but most of them are still possible. Other bad credit loans you can consider include auto title loans, payday loans, and the no credit check loans. Each of these loans comes with a torrent of benefits and perils, which means that you should weigh all available options. It pays to be not only thoughtful but also smart about the loans you intend to apply for. Keep in minds that there are those you should consider avoiding altogether.
Can you get personal loan with a bad credit score?
There are several mainstream sources of personal loans including banks, credit unions and online lenders. These loans can be acquired to serve any purpose. The amount you qualify for depends on the credit report and collateral needed to secure the loan. Credit unions are the best option as they are more flexible when granting loans. When selecting personal loans for bad credit, among the options available include:
- Secured Loan. If your credit is extremely bad, secure loan may be the only option for you. This makes it easy for you to qualify and get better terms. It is critical that you strive to repay this type of loan failure to which you end up losing your collateral that can be a car, home, a savings account, or any item used as collateral.
- Get a consigner. If you have a relative or a friend with a good credit score , you can ask them to co-sign for your loan. The terms of the loan will be based on your co-signer’s credit rather than yours. Due to the risk you pose, it might be hard convincing people to co-sign for you. If you are not sure that you will fully repay the loan, then you should not even consider asking your loved ones to co-sign and risk their credit record.
Credit Union Loans for Bad Credit
As stated above, getting a loan from a credit union than from your bank. Credit union’s loan standards are significantly flexible. Another benefit associated with credit unions is the fact that almost anyone can easily join. In most of these unions, you only have to reside in a certain location or in a particular profession for qualify for membership. Since credit unions are not profit oriented, they tend to be cheaper compared to the banks even as far as their customer service is concerned.
Benefits of credit union loans
- More flexible lending standards unlike banks
- Less penalties and fees
- Offers unsecured loans for bad credit
Perils of credit union loans
- The amount you borrow is based on your credit score
- Unsecured personal loans are only available on short term periods
This is a new but highly reliable way to borrow money with a bad credit. These loans are normally applied on a peer-to-peer lending site. These website are designed to help you get loans from individual lenders instead of a bank or financial institutions.
Today, P2P lending as increased in popularity as an effective way to get loans even with bad credit. However, each website has its own set of requirement that borrowers must meet. Even in this case, your credit history coupled with employment background among other factors are considered for you to qualify for these loans. These loans are unsecured.
Benefits of P2P loans for bad credit:
- These loans are easier to obtain unlike with the traditional bank.
- Lower interest rates compared to credit cards.
- Less fees
- You can explain to your lender why your credit is bad.
- Borrowers can get higher amount that with a bank.
Perils of P2P loans:
- Strict qualification requirements
- You have to raise funds from several borrowers.
- Rates can be extremely high to about 36% APR.
- It takes longer to receive the funds.
If any of your loved ones has a good credit score and ready to co-sign for a loan, you are likely to enjoy good rates and a loan term. Unfortunately, convincing them to be a co-signer, and that you are trustworthy of the loan regardless of your tainted credit history will be a challenge. Should you fail to repay the loan, you co-signer will take full responsibility for the loan which is likely to affect their credit score negatively.
Benefits of co-signed loans:
- Qualification is not based on your credit history.
- Lower interest rates thanks to your co-signer
- Flexible terms
Perils of co-signed loan:
- You put your co-signer’s credit score at risk.
- You risk your relationship with the co-signer.
- Convincing someone to be a co-signer may not be easy.
Secure loans for bad credit
There are numerous variations of secured loans for bad credit. Just like home equity line of credit, you have to offer something up as security. Getting a secure loan with collateral be it your vehicle, home or any other valuable asset makes it easy for people with poor credit.
Benefits of secured loans for bad credit
- You qualify regardless of your credit history.
- Longer repayment period
- Low interest rates
Perils of Secured loan for bad credit
- Needs collateral
- You might get stuck in debt for quite some time.
Loans from family and friends
This is probably one of the hardest type of loans you will ever seek mainly due to the bond your risk to break should you fail to repay. One of the reasons why this may appeal to you is the fact that it not based on your credit score. Getting a loan from a loved one should be your last option. In fact, you should only do it when you are certain that you can repay.
If possible, you should draft a loan agreement spelling out the term of the loan, including the interest if any, amount and number of payments as well as the duration of the loan. This ensures that you prevent hurting your loved one’s feelings, breaking the bond and even legal action. Such a loan is based more on good faith and should only be entered into when you are 100 percent sure that you can repay in full and on time.
Benefits of a loan from family and friends:
- Approval is not based on your credit score.
- The amount is received instantly
- Flexible repayment option
- Low rates of not at all
Perils of a loan from family and friends:
- Not easy to obtain
- Risks your relationship
- Only small amount can be borrowed
- Possible legal action
Home Equity Line of Credit
If you are a homeowner with equity in it, you can go for the home equity line of credit option. However, this does not come without risks given the fact that your home will the collateral. Regardless, HELOC is still one of the best loan option for persons with poor credit.
If you are looking for a bad-credit loan, you can enjoy tax-deductible line of credit as reasonable and interesting rates with zero restrictions on how you choose to utilize the amount. Note that there are limitations when it comes to claiming the line of credit as a tax deduction.
For you to qualify for the home equity line of credit, the loan to value ration should be about 80 percent. This means that, you must have an equity stake in your property of at least 20 percent. If you are yet to pay off your mortgage, the value of your home may have increased significantly since the recession. Lender may also be interested in your employment background coupled with a low debt-to-income ratio.
If you meet all the qualification requirements for the home equity line of credit loan, you should take time to compare different lenders and go for the one with the best rates. As with every other bad credit loans, expect the interest rates to be significantly higher.
Benefits of HELOC loans:
- Flexibility in how you use the funds
- Lower interest rates that the credit cards
- Adjustable lower rates
Perils of HELOC Loans:
- You have to pay closing costs
- You have to offer up your home as collateral
- Banks are likely to can your line of credit
- You might be slapped with steep fees if the line of credit is not used immediately
Mortgage with Bad Credit
When searching for mortgage with bad credit, your options will be quite limited. You can still get a mortgage even with your bad credit score. Experts recommend working closely with your mortgage broker to enjoy a better variety of options.
Even though you are considered risky, you can still land on adjustable rates, which are equally risky since they keep on changing and with them your payment too. Keep an eye on government programs to help you get a mortgage, which usually need less down payment besides being easier to get.
There are mortgage options specially designed for people with poor credit history. These options are referred to as “sub-prime” or “adverse credit” mortgages. Lenders who specialize in this market usually offer these mortgages.
Although they work in a similar manner as the normal mortgage, the interest rates are extremely higher, and you will need a significant deposit to put down. Most lenders in this market will demand a deposit of about 25% to 30% of the total value of the property. Compared to the 5% to 10% you have to pay for a standard mortgage, this may be quite discouraging.
Car loan with bad credit
These loans are specially designed for car buyers with bad credit. Just like with every other bad credit load, expect surprisingly high interest rates as well as working within limited finances than with a good credit. Still, car loan with bad credit options are still available. There are lenders who specialize in offering car loan to individuals with poor credit reports. Keep in mind that there are equally people out there ready to take advantage of your poor credit score. Stay on the safe side and never pay exaggerated rate rates or loan duration exceeding five years.
Payday loan with bad credit
Payday loans are the best option for people with bad credit when in need of fast cash to keep up with bills and emergencies. Unfortunately, these loans can be tricky and need to be handled wisely. In most cases, payday loans for bad credit are usually in call amounts such as $500, and the terms are very short – the next payday when you repay the full amount. Unfortunately, these loans attract steep interest rates but are easy to qualify for especially if you have a job.
Auto title loans with bad credit
Auto title loans and automobile loans are very different. This type of loan allows you to use your car as security just to get a loan. You can qualify for amount less the value of your car, and the lender does not need to check your credit history for you to qualify. Unfortunately, being short-term loans, they tend to have quite high interest rate. Most people easily are hooked to this type of loans and end up renewing it regularly. In some parts of the world, auto car loans are illegal, and you should therefore do your research first to see if your city allows it.
Other Alternatives to Bad Credit Loans
As you have already gathered, with a bad credit, you will have a hard time trying to find the best rates on loan. This should not be a reason for you to stop looking for loans. You need to first consider what it is you need the loan for. If you simply want to consolidate your debts, go for a debt consolidation loan that is best suited for such scenarios. Just like with every other bad credit loans, you will have a hard time finding an affordable consolidation loan.
If all you need to borrow cash for a one-off purchase, a purchase car is a great option for you to look into. Most of these purchase cars come with 0% introductory interest rates. If you are sure of your ability to fully repay the loan within the introductory duration, then this will be beneficial for you.
If failing to repay a debt has earned you a bad credit score, then you should avoid getting yourself in another debt. Keep in mind that there are several other ways for you to manage your finances including setting up standing order which ensure that you are never late on repayments or have a personal budget and stick to it.
A few things to keep in mind about the bad credit
As you probably know by now, getting a loan with a poor credit history is not an easy job. Be on the lookout for other seemingly enticing but worse options especially when you are desperately in need of cash. For example, although payday loans are easy to come by, you should endeavour to avoid them since they only make things worse for you.
If all you want is a bad credit loan to help you correct the wrongs on your credit report, then the bad credit loans discussed above can be useful. You should, however, ensure that the loan is fully repaid and ensuring that you never fall behind on the repayments. Keep in mind that you will also be paying significantly higher interest rates that with your credit cards. Lenders will consider a number of factors before lending you the amount. Among the factors considered include employment, income and the property you own. This is due to the fact that, and as mention above, you are considered a high-risk borrower. On the other hand, if you stick to the repayment schedule and ensure that the loan does not get you deeper into debt than you can afford, then you will soon be able to repair your credit rating.
Improve Your Bad Credit Rating
Your credit score is a reflection of your credit repayment patterns over time with more focus on any recent information. Here are a few tips to help you rectify your credit score:
- Always pay bill on time. Late payments will have a negative impact on your credit score.
- Keep your credit card balances low
- Keep only the credit accounts you need. Instead of opening multiple accounts, just improve the current one.
- Pay off your debts instead of running from debt collector. Avoid closing unused cards as a short term means to fix your credit score. With the same debt but with few open accounts will help lower your credit score.
Paying your bills on time will help improve your credit score. Regardless of how small the amount you owe is, it is important that you keep up with the payment and in a timely manner. Keep in mind that any open credit application will show on your credit report, informing lenders that you are taking another new debt. With negative information on the credit report, including late payments or multiple inquiries, you should consider paying and waiting. When it comes to improving your credit score, time is you biggest ally. Repairing credit score can no quick fix options.
How does each change and action affect your credit score? This is a common question with most people trying to repair bad credit. For instance, how does closing two accounts help to improve your credit score? Although this question may appear quite easy, there are several factors to consider.
A single change is likely to affect multiple items on the credit report. However, it is almost impossible to give and accurate assessment of how any one action affects your credit score.