Having bad credit means you have a low credit score or a short credit history, if you are paying your bills late or not paying at all this can be the cause of a bad credit rating.
It does not necessarily mean that you can not apply for a personal loan with bad credit. There are loans for people with bad credit. These loans can be secured which means that they are backed by collateral like a house or a vehicle or unsecured.
You should know that the interest rates for these loans can be way high than for people who have good credit and they vary with each lender.
What is a bad credit score?
When your fisco credit score is between 300 to 579 you are regarded as someone with a bad credit score. This can affect your ability to be approved for some loans and in some cases you may even fail to rent a house or even buy your dream home.
If you are not sure about your credit rating you can check your credit score here.
Most of the loans for bad credit that you can get approved will require you to pay high interest rates and higher fees. It is a good idea to work on your credit score first before you look for a loan.
What makes up a bad credit score?
When FICO calculates your credit score it uses 5 pieces of information:
- Payment history (35%).
- Amounts owed (30%).
- Length of credit history (15%).
- New credit (10 %).
- Credit mix (10 %).
If your finances fall short in some of these areas, your credit score will drop. For example, if you have a history of late payments, This will have a huge impact on your credit score, since payment history contributes the most to your credit rating.
If you once declared bankruptcy, or your home foreclosure and borrowing more than you can handle could also result in you having a bad credit score.
How can I get a bad-credit loan?
Applying for a personal loan with bad credit and getting it isn’t impossible, but it requires thorough research to find the most affordable loans possible. I have listed a few steps below that can help you do this
- Check your credit score. You should always know how your credit stands by requesting a free credit report from AnnualCreditReport.com. You are supposed to get one credit report every year from each of the credit reporting agencies free of charge, though you can currently access weekly reports through April 2021.
- Payback the loan . Do not take a loan if your income can not withstand an additional monthly loan repayment.
- Compare bad-credit personal loans. Having a relationship with your bank may also help you in this case, the bank may give you a personal loan because they know you. There are also personal loans for bad credit online, you can find this here
- Take advantage of prequalification. When thinking of applying for a loan, many of these online lenders allow you to check if you qualify without a hard credit check. This might be a good way to look around for a bad-credit loan without impacting your credit rating further.
- Look into secured loans. Secured loans are the best if you have a bad credit, Remember this type of loan must have a collateral such as a house or a car to back it.
- Add a co-signer if necessary. If you have a friend or relative with good credit they can co-sign the loan with you, which will mean if you fail to pay back the responsibility will be theirs to pay back, but you wouldn’t want to do that would you?. Having someone with good credit will also help you get a loan with lower interest rates.
It is always a good idea to always work on your credit first before looking into getting a loan, since this will always be the most efficient way to get low interest rates on your personal loan. You can always lower your credit score by budgeting and always paying your bills on time. Never chew more than you can swallow, always take a loan that you can payback.
5 types of bad-credit loans
The main options when it comes to getting a personal loan when you have bad credit are these two, Secured and unsecured but you still have other options if you have trouble getting a traditional personal loan.
Like I mentioned in the beginning personal loans can be secured or unsecured. If you are looking to get a secured loan from your lender this will mean that you have to have some form of collateral such as a car or a house These types of loans offer more favorable rates and terms and higher loan limits, since not paying the loan will mean you might lose what ever you might have put up as collateral, if you have bad credit, it may be easier to get a secured loan than an unsecured one.
Unsecured loans don’t require any collateral, and the rate you receive is based on your creditworthiness — This means it may be harder to qualify for an unsecured loan if you have below-average credit. This kind of loan comes with high interest rates since there is no collateral that you are going to put up
2. Payday loans
These are short-term loans, typically for $500 or less. Payday loans charge incredibly high fees in exchange for fast cash, and repayment is typically due by your next paycheck.
Pros: The lenders don’t run credit checks, so it will be easier to get approved with them than with other lenders.
Cons: The cost of borrowing is high — the interest can be as high as 400% in some cases — so it’s important to weigh your other options first. Payday lenders can also be predatory in nature, so make sure to thoroughly research any potential companies you’re looking into before signing up.
3. Cash advances
This is similar to a short-term loan and is offered by your credit card issuer. The sum you receive is disbursed in cash and is borrowed from the available balance on your credit card.
Pros: If you have an agent cash need cash advances are one of the fastest ways to get cash
Cons: Cash advance interest rate may likely be higher than your card’s standard purchase APR and higher than interest rates on personal loans.
4. Bank agreements
Your bank may approve you for a short-term loan or minimal overdraft agreement. This is all depend on your banking history and ability to keep your account open. You can always contact your bank to know more about this option.
Pros: Having a good relationship with your bank will help you get that small loan you may be in desperate need of and a bank agreement may be the answer to your problem.
Cons: Bank agreements are not official bank policies so they may not be a reliable way of borrowing money.
5. Home equity loans for poor credit
Home equity loans are secured type of loans where you need to use your home as collateral for the loan you are going to take. This also means the interest rates may also be low because it is a secured type of loan.
Pros: Home equity loans are easy to get if you have bad credit because they are secured by a collateral which in this case is your home.
Cons: Failing to pay back this type of loan may mean that you might lose your home to the lender.