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What is a Bad Credit Personal Loan?
While we typically talk about a credit score coming from one agency, multiple agencies publish credit scores. Each has slightly different criteria and range, and what’s considered poor credit at one might not be considered poor credit by the others. Three of the credit agencies and their range for poor credit are as follows:
Equifax - A score of 280-559 is considered poor.
Experian - A score of 300-579 is considered poor.
Transunion - A score of 300-600 is considered very poor, while a score of 601-657 is still considered poor.
As you can see, in general, any score from the lower range of 280-300 to an upper range of 560-600 is going to be considered poor. Just above that is the range of fair credit, which begins as low as 560 and generally goes as high as 719, depending on the agency. So on average, a score of 600-660 can be considered fair.
There are several reasons you might have a poor credit score with any of these agencies. A recent bankruptcy will almost always result in poor credit for two or more years following. Other potential reasons for poor credit include late payments, charge-offs, defaulting on loans, or simply short credit history. Because lenders use credit scores to determine the interest rate charged, a poor credit score will inevitably lead to higher APRs from lenders. Those with poor credit looking to consolidate their debt will often find that a debt consolidation loan company can offer a better interest rate than payday loans or credit card companies.
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Comparing Bad Credit Loan Options
When comparing lenders for bad credit score loans, the first thing you want to check for is if there is a credit score minimum. You can save yourself time by only applying for loans that do not require any minimum. You also, ideally, want to select a lender that offers flexible terms, which includes factors such as repayment fees, the length of the loan, and so on.
Lenders may also consider the following qualifications when seeking a loan with a poor credit score:
- The borrower's debt-to-income ratio, or what percentage of your gross monthly income goes towards paying your monthly debt payments;
- Your monthly cash flow, which is your total gross monthly income from all sources;
- Any collateral you might have to put up against the loan. These could be real estate, boats, cars, or any other valuable asset;
- If there is a co-applicant for the loan, the lender will also consider their credit score. If it is good, that could not only qualify you for a loan; it might also get you better terms.
It is also important to consider the loan terms, which include the following:
- The interest rate. The lower this is, the better off you’ll be since more of your payment will go towards paying down the principle rather than going towards interest.
- The length of the loan. Included in this is the ability to pay the loan off early. You may choose a longer loan term to keep your monthly payments low, but with the intent to pay down the principle through additional payments.
- Monthly payments. Try to keep these reasonable. You don’t want a monthly payment that’s so high that you might not be able to meet it easily each month.
Watch out for the "small print":
- Fees. You can expect some standard fees, such as loan origination fees. Be careful, however, as these fees can be as great as 10% of the loan value.
- Penalties. Take note of the potential penalties, such as late payment. Also, look to see if there is a penalty for paying the loan off early. Avoid this type of penalty if possible.
Turn the loan into an advantage; your bad credit loan doesn’t have to be bad.
Instead, it presents you with an excellent credit-building opportunity. There are two prominent reasons for this:
- This type of installment loan improves your credit mix. It can also slightly boost your credit score by adding a new installment loan. Just be sure you can make the monthly payments. Miss those, and your credit could be worse off than before.
- By paying off your credit cards with the debt consolidation loan, you’ll significantly improve your credit utilization rate, which is a major factor in determining your credit score.
Additionally, it’s important to pay attention to the APR as opposed to the interest rate. APR will include any hidden fees that may be involved when securing a loan from a lender so you can have a better idea of what you’ll be paying.
This is where marketplace lenders come in handy. You only have to submit one form to view offers from multiple lenders, making it easy to compare rates and terms.
The Best Bad Credit Loans by Need
If you’re unsure where to start in your search for loans with no credit or loans with bad credit, there are many reputable lenders and marketplaces that cater specifically to those with poor credit or no credit at all. These lenders will view not only your credit score but your entire financial profile for the approval process. Determining creditworthiness includes your debt-to-income ratio, your income, job stability, and other factors.
Uses for Personal Loans While Having Poor Credit
Even with bad credit, you can still qualify for all kinds of loans — personal loans or otherwise. Just be prepared to spend more time researching so you aren’t stuck with the bottom of the barrel when it comes to loan terms and rates.
Most of the time, those with bad credit wouldn’t be taking out new personal loans. However, there are some situations where someone might be compelled to do so. Taking a personal loan for financing medical expenses is one common example since your health is irreplaceable.
Most people wouldn’t want to get extravagant with personal bad credit loans though. They might take a car financing personal loan if they need that vehicle for work but doesn’t make good financial sense to finance a car as a luxury.
Another possibility is taking an emergency household personal loan. But again, one should make sure that it’s necessary and that they had exhausted all other possibilities before considering a personal loan.
Types of Loans for Bad Credit
Several types of personal loans are accessible, even when you have a poor credit score. Among these are both secured and unsecured loans, credit cards, and cash advances. If you have no alternative to high interest rate bad credit loans, then these are the various loans you might consider:
- Personal secured loans: Secured loans are backed by collateral, making them the easiest type of loan to be approved for when you have bad credit. The types of secured loans you might come across include mortgages and home equity loans, auto loans, and home equity lines of credit (HELOCs). Because you’re securing the loan with some type of collateral, it is imperative to be confident you won’t default, as the lender would then be able to take the asset used to secure the loan.
- Personal unsecured loans: If you don’t have collateral for a secured loan, or don’t want to use the collateral you might have, then an unsecured loan is the answer. Many lenders are offering unsecured loans for those with poor credit scores. These include banks, credit unions, online lenders, and others. Unsecured loans typically have a shorter repayment period, often less than five years. Because there is no collateral securing the loan, this type of loan is usually more expensive than a secured loan.
- Credit cards: If you have a credit card, you can certainly use it to consolidate any other debts you might have. And when used properly, credit card loans can help you improve your credit score. The important thing to remember is that you’ll need to be able to pay at least the minimum payment every month. However, it would be wise to pay more than the minimum; otherwise, you could be paying the loan back for an extremely long time, and your interest charges over time could be more than the amount you borrowed.
- Cash advances: Credit card issuers will often offer cash advances when you need a small amount of funds quickly. Another alternative for cash advances is payday lenders; however, these loans can have extremely high interest rates. Often they need to be repaid within weeks, if not days. In general, any type of cash advance loan will be the most expensive option for a bad credit borrower.
The Implications of Bad Credit on Securing a Loan
The system of credit scores is designed to measure a borrower’s ability to pay back loans over time and ensure that borrowers don’t exceed a set percentage of their income in terms of the amount borrowed and their monthly payments. Higher credit scores indicate a borrower who is more likely to repay their loans. Lenders prefer to work with customers who have a proven track record of paying their bills on time and earning enough money to stay on top of their debt while honoring all terms and agreements. That said, lenders make their money by charging interest on loans and will accept additional risk, in the form of a risky borrower, in exchange for higher interest rates on the loan.
What is Considered a Poor Credit Score?
Credit scores are determined by the four credit reporting agencies, and each has its own methodology for calculating credit scores. Factors included are payment history, amounts owed, length of credit history, new credit, and credit mix. Typically, any score under 600 will be considered "poor" credit and will impact the ability to secure a loan.
A credit score under 600 likely won't completely disqualify one for a loan. Still, it will increase the interest rate and, by extension, the total amount paid on the loan over time.
Bad Credit Loans to Avoid
One example of a bad credit loan to avoid is a payday loan. This is a short-term, small amount loan that provides quick cash but incredibly high-interest rates — sometimes as high as 400%. This option can be tempting because virtually anyone can get approved, including those with the lowest of credit scores.
It’s highly advisable to pass on these types of predatory loans, as there are plenty of loans available from reputable lenders with more reasonable interest rates. Sure, with bad credit your APR may be higher than if you had good credit, but it will not be as high as the APR one would pay on a payday loan or similar cash advance loan.
How to Avoid Bad Credit Loan Scams
Whenever money is involved, you can be sure there are unsavory characters looking to scam honest people. Unfortunately, the bad credit loan industry isn’t immune to this, so consumers need to keep their eyes open for potential scams. There are several ‘red flags’ one can look for to avoid potential scams. Such red flags include:
Guarantees before assessing application - Lender approval is always based on factors that include the borrower's credit history, employment status, debt-to-income ratio and other factors. If a lender offers guaranteed approval before assessing these factors, it's almost surely a scam.
Missing state license/registration by the Federal Trade Commission - Lenders and loan brokers must be registered in the states where they are doing business. So if you can’t find a state registration or license for the lender or loan broker, it’s a certain red flag that you’re being scammed.
Pressure for immediate action without due consideration - Reputable lenders do not have constantly changing loan conditions. Therefore, they will not pressure you into accepting a loan based on some deadline. Instead, the reputable lender would be more likely to delay as they take time to research your credit history fully.
Prepayment (outside of reasonable processing fees) - These are also known as “advance-fee loan scams”. The scammer lures borrowers in by offering low-interest rate bad credit loans and then asks for fees in the form of applications, processing, or documentation. Remember that legitimate lenders always disclose all their fees and often roll those fees into the loan itself rather than asking for prepayment.
Unsecured website - Lenders handle huge amounts of personal information, including social security numbers, birth dates, and login credentials. This means they need extremely secure websites to protect their customers. When dealing with websites, this means having a Secure Sockets Layer (SSL) certification. You can check for this by looking at the URL of the website. If it begins with “HTTPS”, it is secure, but you should avoid it as a potential scam if it only has the “HTTP” prefix.
Lack of a physical address - A reputable lender will always have a physical address where they conduct business and receive mail. Even lenders who work exclusively online will have a physical location as their headquarters. A physical location means customers can visit the business. It also provides accountability for the business to be contacted in the event of some legal action. Any lender without a physical address should be considered a potential scam. Even lenders with a P.O. box should be handled with care.
Steps for Applying for a Personal Bad Credit Loan
A bad credit score doesn’t have to stand in your way if you need a personal loan to cover an emergency or other expenses. Getting a personal loan with a low credit score doesn’t have to be complicated either. Just follow these five steps:
- Check your credit score. Many lenders have minimum credit score requirements, so applying if your credit score is below their requirements is likely a waste of time. Besides checking the score, you might want to look at the full credit report to make sure no errors are lowering your score unnecessarily.
- Compare several lenders. Each lender not only has its own credit score requirements, but they also have its own rate ranges and other borrower requirements, so it’s worth it to look into several potential lenders. You could get lower fees, a better interest rate, or other upgrades to help improve your credit score or manage your loan payments.
- Pre-qualify. When you pre-qualify for a personal loan, you’ll know the interest rate, loan amount, and repayment terms in advance. Plus, pre-qualification does not affect your credit score. Therefore, it can be especially useful in comparing loan offers.
- Add to your application. Consider adding collateral or a co-signer to your application. You can take a secured loan with collateral, which typically offers a lower rate and could help you qualify for a loan that the lender might have otherwise rejected. Co-signers can provide the same benefits since the lender also takes their credit score and income information into account for the loan.
- Apply. Gather other documents you might need, such as W-2s or pay stubs and file that application. Some lenders can give you a decision the same day, while others might take several days, but none will be able to provide you with a decision until you apply.
Tips for Finding a Better Bad Credit Loan
So how do you get a personal loan with bad credit or get a loan with no credit at all? The key is to put in the time to research your options. Gone are the days when consumers were limited to traditional brick-and-mortar banks and credit unions.
In today’s digital age, there’s a wealth of online lenders to choose from when it comes to finding and comparing loans. Just prepare yourself—having poor credit means you won’t qualify for all of them, and those you do qualify for will come with a higher APR.
If you’re having trouble getting approved or finding a comfortable interest rate, here are a few ways you can get approved for loans with bad credit:
Get a Co-signer
If you have a friend, spouse, or close family member with good credit, having them cosign on your loan can make a difference in whether or not you get approved. Additionally, having a trustworthy cosigner can also snag you a better interest rate on your loan.
Marketplace Lenders
Try using an online personal loan marketplace like LendingTree. These platforms are free to use and they work with reputable lenders. You can see if you qualify for a loan in a matter of minutes after providing a few details about yourself and your financial profile. From there, they’ll run a soft credit check which won’t harm your credit score, and you can then compare rates from lenders you qualify for.
Improve Your Credit Score
If you aren’t satisfied with the bad credit loan terms you’re receiving from lenders you qualify for, it’s time to start working on improving your credit score. Even if you need a loan fast and ultimately decide to opt for a high-interest loan today, getting started on boosting your credit score now can help you earn better loan rates or even refinance your loan in the future.
Here are a few ways you can improve your credit score:
- Always pay your bill on time, every time. When viewing your credit report, lenders care about payment history, which will give them a better idea as to your ability to repay a loan on time.
- Keep your debts low. Lenders also pay attention to your debt-to-income ratio, so it’s best to pay down your debts rather than racking up new ones.
- Don’t max out your credit cards. The more available credit you have on your credit cards, the better. In fact, it’s a good idea to request a higher credit limit on your credit card even if you don’t need it—just do so sparingly, as this will require a hard credit check.
- Keep unused credit cards open. While it may be tempting, don’t close out unused or paid off credit cards. Doing so can hurt your credit. Keeping a credit card open will increase your credit history, which is a good thing and can give your score a nice boost.
- Review your credit report. Check your credit report for any errors or inaccuracies that can affect a lender’s decision when approving you for a loan.
- Add yourself as an authorized user. If you have a friend or family member with good credit, you can improve your credit simply by having them add you as an authorized user to their credit card or loan. Just keep in mind that while this can help your score if they make payments on time, it can also hurt it if they don’t.
Conclusion
Searching for the best personal loan with satisfactory rates and loan terms will always require work, whether you have excellent credit or bad credit. If you have a little time on your side, start researching the various lenders out there—whether it’s a traditional bank, credit union, or online lender. While many lending institutions place a heavy emphasis on one’s credit score, there are just as many who look at other factors when making a decision.
If you need a loan fast but aren’t happy with the rates you’re seeing, try adding a cosigner to give you a boost, or even applying for a secured loan if you have a valuable asset to back it up. And remember, it’s never too late to start improving your credit score. You can build it up faster than you think, and doing so will open the doors to much better loan rates in the future.
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