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How to Qualify for Bad Credit Loans

There are times when we find ourselves in need of money to take care of a particular bill that was may be unexpected or expected but you find that what you have saved is not enough to take care of the expense. Then we think about borrowing from potential lenders. When you talk about borrowing, your potential lender has to assess your credit score. Credit is essentially the level of trust potential lenders have that you will repay the money you’ve borrowed.

Your credit score can fall from anywhere on a scale from having very bad credit to excellent credit. If you are on the lower end or simply very bad credit, then no one will be willing to lend you any money. If you have an outstanding credit then banks and credit companies will be more than willing to lend you money.

What is Bad Credit?

Bad credit is a record of a person’s past failures to repay debts on time and in full which results in the inability to get approved for a new loan. Basically, when you fail to pay your debts on time and in full, you will have bad credit.

If you have ever taken out a loan, you use a credit card or you pay a bill over time, then you have a credit score. There are companies known as credit bureaus that collect your credit history and compile it into a credit report. However, your credit scores might not be uniform across all the agencies, due to errors or omitted information because each company keeps its own separate report.

Your credit report is summarized with a score. The score indicates the borrower’s credit risk. If your credit report is summarized with a low credit score, it signals bad credit. If it is summarized with a high credit score, then you have good credit.

With bad credit, it becomes difficult for a person to get approved for a new loan, and if they get approved, the loan will be offered at a very high rate of interest. Typically, charging the high-interest rates is the lender’s way of compensating themselves for the risk of lending you money.

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FICO Scores  

Credit bureau agencies calculate your FICO score based on your credit information. FICO stands for Fair Isaac Corporation, and it’s the one that developed the software and algorithms to calculate the credit score, hence, the name.

FICO scores range from 300 to 850. A person with a score at or below 579 is considered to have bad credit. Those with low credit are more likely to default or become delinquent on their loans in the future.

Scores between 600 and 670 are considered fair or the low end of good credit score. Borrowers with such kind of scores are less likely to become seriously delinquent on their loans, thus, they are considered less risky to lend to than borrowers with bad credit scores.

Scores closer to the 800 mark, are labelled excellent or outstanding credit scores. Those with outstanding credit scores have less trouble securing loans and they face normal interest rates. It should be noted that even borrowers with fair credit scores may face higher interest rates or have trouble securing loans compared with borrowers with outstanding credit scores.

Different Types of Financing Available for People with Bad Credit

There are several different types of financing or loans available for people with bad credit. The bad credit loans range from personal, home and auto loans with less-than-favourable terms to short-term, payday and auto title loan with no-credit-check. Each of these loans has its own pros and cons, and you will find out that some are a much better choice than others.

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Fixing your credit score can take years, and you might be denied a loan due to bad credit in the past. Therefore you might want to find a lender who can lend you money even with bad credit. With these financing options, you will realize that you have more borrowing options than you would think. Here are a few of the best loan options for those with bad credit.

  1. Bad Credit Personal Loans

Bad credit personal loans are loans that you take out for any purpose. A lender will offer you an amount that really varies widely based on your credit, whether the loan is secured or unsecured. A secured loan is one that is backed with collateral that your lender can seize if you fail to pay back the loan. An unsecured loan, on the other hand, is one that is not backed with collateral.

  • If you have bad credit, opting for the secured can be a good decision. This makes it easier for you to qualify for a loan and actually get offered more favorable terms, such as higher loan amount and a lower APR as well. However, you need to be absolutely sure that you will pay back the loan on time, otherwise, you could lose whatever you have used as collateral.
  • Another viable option for bad credit personal loan is to get a co-signer or a guarantor with good credit to sign for a loan with you. The lender, therefore, will use the co-signers credit to set the terms for the loan. This is actually a huge risk for the co-signer because he or she becomes equally responsible for the payment of the loan if you default them. You need to assess your ability to repay the loan, and if you think it might be difficult to repay the loan, you would want to save your friend or family member the trouble of becoming a co-signer, or you will risk their finances and your relationship too.

However, when borrowing bad credit personal loans, you need to be careful about lenders who don’t thoroughly check your credit history, your ability to repay and other financial circumstances. Also, experts warn against expensive insurance add-ons that ensure the loan will be repaid if you die or become disabled.

  1. Credit Union Loans

Credit unions offer an easier way to get a personal loan than banks do. This is because:

  • Credit unions have more flexible credit standards that one can meet.
  • It is very easy to join a credit union, almost anyone. Sometimes the membership eligibility is as simple as residing in a particular location or being in a particular profession.

Credit unions are basically non-for-profit entities, therefore, they can offer a loan as well as other financial services much more easily and cheaply than banks. Bette yet credit unions pay much attention to their level of customer service much more compared with banks. However, the amount of loan that you can access will depend on your credit score and loan type.

  1. Bad Credit Mortgages

It is possible to get a mortgage with bad credit. This, however, gives you more limited choices and the interest rates will be very high. According to experts, it is important to work with a mortgage broker who will help you evaluate your options.

One of the best options for bad credit mortgages is an adjustable rate mortgage. It is actually easier to qualify for it than conventional fixed-rate loans. But it can put you in a terrible trap for larger payments once your introductory rate resets after a few years.

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  1. Auto Loans

If you want to buy a car and you have bad credit, you can still get a loan that has less favorable terms, and that is known as a bad credit auto loan. The loan will generally have a higher APR and you might receive a lower loan amount than auto loans advanced to buyers with good credit.

To get an auto loan, all you need to do is to find a reputable lender who is focused on bad credit auto loans. You should be wary of unscrupulous lenders who may want to take advantage of your bad credit with shady tactics. Such dealers might lead you to believe that your credit is actually worse than it is or they might want you to buy add-ons to the loan. Generally, you should avoid a loan high-interest rates in double digits and those with terms longer than five years.

  1. Home Equity Line of Credit

If you own a home and have equity in it, you might consider acquiring a home equity line of credit. This, however, comes with risk because you will be using your home as collateral. However, a home equity line of credit is one of the best options for people with bad credit.

When you consider getting a home equity loan, with bad credit, you can actually secure a tax-deductible lien of credit at a favorable interest rate and one that comes with no restrictions on how you spend your money.

For you to qualify for a home equity line of credit, your lender will require you to have a loan-to-value ratio of about 80 per cent or below. Your lender will also look to identify whether or not you have strong employment history and a low debt-to-income ratio.

  1. Peer-to-Peer Loans

Peer-to-peer loans are a reliable way to borrow money even with bad credit. The loans are offered on various platforms which you can easily access online. The platforms allow prospective borrowers to obtain loans from individual lenders or investors rather than from banks or other financial institutions.

Today, Peer-to-peer lending is a popular way for people to obtain bad credit loans. However, potential borrowers have to meet the requirements that have been established on various platforms. Loan amount limits and APR can widely vary based on your credit history, employment history and other factors. You could actually qualify for loans with rates as low as 5.24 percent APR. Another thing you should note is that P2P loans are unsecured.

  1. Payday Loans

Payday loans are another option available for people with bad credit. Payday loans are usually small and they can be $500 or less. So they are not a good option for people who want to take care of huge expenses. These loans are made for a short period of just a week or two before repayment is made on your next payday. Payday loans are easy to obtain, only you to do is to provide proof of your income. The lender on the other side will require you to write a check for the loan amount plus the interest rate that will be used for repayment. The lender can have electronic access to your account.

Payday loans, however, are associated with very high-interest rates and fees. For example, you may pay about $10 to $30 in interest rates and fees for just borrowing $100. Now do the math, for instance, if you pay $15 to borrow $100 for two weeks, you will have a huge APR of 400%. Additionally, when that two-week deadline approaches, many lenders tend to allow you to pay only the interest rate and then they roll over the loan. This is actually so tempting that many low-income borrowers have been trapped in a cycle of debt because all they can afford to do is repay the excessive interest and not the loan amount.

  1. Auto Title Loans

Auto title loans are different from auto loans meant for car buyers. To obtain the auto title loans, you will have to use your car as collateral. This loan can be used for any purpose. The loan amount that you can get varies and is usually much less than the actual worth of your car. Usually, the lenders do not perform a credit check in order to advance an auto title loan to you.

Auto title loans last for a very short period, usually 15 or 30 days and they have a huge APR. These kinds of loans can easily trap borrows into a debt cycle, as they continue to roll over the loan making interest-only payments.

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Are Bad Credit Loans Right For You

Bad credit can make it difficult for you to obtain a loan from a bank or any other financial institution. Another downside of bad credit is that it takes years to correct. However, there are financing options available for people with bad credit. With the above options, you can get a bad credit loan and take of your needs. But you need to be wary of unscrupulous dealers. Also, be careful not to get trapped into the cycle of debt with some loans.