Many sources assume that you have good or at least neutral credit when looking at loan advice online. As a result, their solutions may not apply to those with bad credit for whatever reason.
If you currently fall in the bad credit camp, you've probably encountered this. Fortunately for you, many institutions believe that bad credit shouldn't bar people from getting a loan.
Here we've covered the personal loans available for those with bad credit and other pertinent information, like their interest rates and any catches that may be involved. After reading this page, you should know everything there is to know about bad credit loans.
Types Of Personal Loans Available
Before we go deeper into bad credit loans and how they can work for you, let's go through the different types of personal loans that are typically available.
Unsecured Personal Loan
The best personal loan is an unsecured one. Unsecured loans are where the collateral isn't required to guarantee the loan, so you can't lose any of your personal assets if you fail to make payments. On the other hand, late payments will hurt your credit and your loan could be subject to a collections process.
The credit score requirement can be as low as 670 to as high as 740. Sometimes it can be lower if you have a co-signer, but they'll still be unattainable for those with bad credit.
Secured Personal Loan
Secured loans are those that take the collateral. Auto loans will hold your vehicle as collateral, while other loans can use your property to guarantee repayment. If the borrower doesn't make repayments, the collateral can be seized by the lender in place of payment.
If you can reliably pay it off on time, you shouldn't have to worry about having your property seized. In that case, the upside is that secured loans have a lower interest rate when compared to unsecured loans.
Debt Consolidation Loan
Debt consolidation loans are used to combine multiple debts into one loan with one payment. They're a great way to reduce monthly costs and create a more affordable and easily manageable loan.
How Bad Credit Affects Your Ability To Borrow, And How These Loans Can Help
Bad credit will stop you from getting most loans out there. When a borrower has bad credit, it means they have debts that haven't been paid in time, or at all, in the past. This indicates that the borrower may not pay future debts, so a lender who gives them money is taking a more significant risk.
If your FICO score is below 670, you will generally be prohibited from getting a loan from providers. It isn't impossible, however, and many government-backed schemes mitigate risk for the lenders so that they cater to those with lower credit scores. A great example is the Small Business Administration and how they back loans for lower credit score borrowers.
It's also possible to put up collateral to guarantee you'll pay the debt, like a vehicle or a house, as we discussed when talking about secured loans above.
Getting a loan when you have bad credit has two main benefits:
- First, it allows bad credit borrowers to access financing.
- By paying the loan in time, you improve your credit score.
As your credit score improves, you will slowly become more acceptable to more mainstream loan providers. This means you can get better interest rates, longer repayment periods, and won't need to risk your assets when taking out future loans, where you can borrow more.
Which Loan Types Have The Highest Interest Rate?
When you have low credit, you'll have to contend with higher interest rates. Lower interest rates are commonly withheld for borrowers who can prove they will pay back any money they borrow.
It is generally held that personal loans and credit cards have the highest interest rates of any more common loan types (like mortgages, student loans, or car loans). That makes sense since they are generally unsecured and allow you to use the money however you see fit, instead of restricting how it's spent.
That said, they are often surpassed by cash advances for credit cards and “quick cash” or “payday loans”.
For credit card cash advances or convenience checks, you'll typically pay around 5% of the advance amount and then wrestle with a higher APR than usual. Cash advances don't harm your credit score but do increase credit card debt, influencing your credit usage ratio and indirectly hurting your credit score.
Payday loans are the most expensive (and predatory) loans out there. I recently looked at the fine print on a payday loan and it amounted to a 100% APR…insane. This was after you added up the initial fee, general percentage rate, and the payback timeline.
To work out the total interest paid on a simple loan, you should find out the loan amount, the initial fee if any, the ongoing interest rate, and how long you'll be repaying the loan. From there, it's easy:
Principal Loan Amount x Interest Rate x Time (in years) + Initial fee = Interest Amount.
For an easy example, if you borrow $10,000 at a 5% interest for 3 years with a 5% initial fee, it'll look like this:
($10,000 x 0.05 x 3)+($10,000 x .05) = $2,000 in interest and $12,000 in a total repayment amount.
What's The Fine Print?
As we've covered, you're likely taking some high-risk loans if you have bad credit. This will worry some borrowers, so let's cover what happens if you're late for a payment.
You should get a letter requesting the payment along with a missed payment fee. If you continue to miss payments or even default, you'll get a default notice letter. That notice is added to your credit report, negatively affecting your credit score.
Then the debt may undergo the collections process. This is where it is passed to a collection agency that takes steps to get the loan from you, typically through court judgments. They often add their own fees too, so they'll take more than the loan amount in cash or assets.
Lastly, don't borrow money for the wrong reasons!
I think it's worth saying that we should not take on debt for the wrong reasons. Especially don't take on debt to buy items that you don't need or can't afford.
Here are a couple of items to consider
OK Reasons To Get A Bad Credit Loan
- Consolidating higher rate loans into one manageable loan at a lower interest rate than the loans you are consolidating.
- Home improvements that you truly need, like augmenting a bathroom for a newly disabled person in your home. If you can do this with a HELOC, I would go that way.
- Large medical bills that you can otherwise not pay and would likely negatively affect your credit if you don't
- You might consider a bad credit car loan because not having a car can hamper your work and home life.
Bad Reasons To Get A Personal Loan
- Making big purchases that you can't afford or don't need, like consumer products or a vacation.
- Salvaging a poor credit score. For this, I would opt for a secured credit card with a lower interest rate.
- Try to avoid a quick cash or payday loan at all costs.
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