How to Get a Loan When You Have Bad Credit
Do you have poor credit? Unfortunately, if you do, it can be very hard to get a loan from many mainstream lenders, such as most major banks. If you do manage to get approved, a low credit score can definitely make your interest rates go up. However, it can also be tough to determine the exact cause of poor credit, being that your credit score is calculated using numerous factors.
Look here to find out how consumer debt can affect you.
So, if you’re trying to get a loan, but you have credit, keep reading. We understand how hard it can be to get approved when you’ve had debt problems, especially when it comes to bankruptcies, consumer proposals, or other financial setbacks. Have no fear, Rebound Finance is here to help you out.
What Factors Cause Bad Credit?
In the United States, three-digit FICO credit scores generally range from 300-850, although some versions vary. For instance, many automotive and credit card companies use a scale that ranges from 250-900. According to the three major credit reporting agencies in our country, which are Equifax, Experian, and TransUnion, a credit score that’s 630 or higher is where potential borrowers should aim to reach if they’re looking to get approved and are looking for the most favorable interest rates.
As we mentioned, if your credit score falls below 650, it can be due to any number of factors. Typically, a lower credit score starts with a string of missed payments. The situation can also become worse when you experience more detrimental financial occurrences, such as a consumer proposal, go through a debt management program, file for personal bankruptcy, or any other issue caused by severe debt. With every poor credit-related transaction you make, your credit score will drop a few points.
When a lender, such as a bank or other financial organization is considering you, they’ll perform what’s known as a “hard inquiry” through the credit reporting agency they’re partnered with. They do this to examine your credit history, which includes a record of your payments and other debt-related issues, and to determine how creditworthy you may be. Hard inquiries also cause your credit score to drop a few points. While this may not be the exact source of your poor credit, it’s best not to apply for too many different loan products within a short time frame, specifically for this reason.
“Soft” inquiries, on the other hand, are caused when you yourself, a potential landlord, or employer checks your credit report for any reason, and do not affect your credit score.
For more information about credit inquiries, read this.
Loans for Bad Credit Borrowers
While your credit might not be in the shape it needs to be in order for you to qualify with a prime lender, such as a bank, there are plenty of loans out there that you can still get approved for.
Bad Credit Personal Loans
Seen frequently with borrowers who have bad credit, one of the first credit products you can try is a personal loan. These tools are often used as a way for those same borrowers to deal with their multiple, smaller debts, such as those from credit card usage. That being said, it’s also possible to use a personal loan for many other expenses, such as household repairs, buying groceries, etc.
Subprime lenders, whose clienteles are mostly made up of borrowers with unfavorable credit, offer these kinds of loans, which can be paid off using regular installment plans. However, one downside to a bad credit personal loan is that it can put you, as the borrower, in even worse debt if you don’t manage to make your payments on time. Like with any type of credit product, you need to be responsible. If, for example, you’ve offered up any of your assets (car, house, or other property), in the event that you default for too long, that asset may be seized as collateral. At the very least, if you start missing payments, you’ll be charged a penalty fee and your interest rate will go up. If this behavior continues for long enough, your debt might be sold to a collection agency, who will pursue your case until you’ve paid what you owe. If the debt is large enough, they may even decide to pursue legal action against you.
What else happens if you can’t afford to make your loan payments on time? Find out here.
Bad Credit Car Loans
Another common type of loan that people with bad credit can still qualify for is a car loan, which is also available through most subprime lenders. Since cars can be expensive, many drivers require financing to pay for various repairs, the cost of registration and insurance, or to pay for the whole vehicle through a private seller or chosen dealership. These types of loans are also appealing simply because the applications for them are reviewed and approved within a short period of time and are easier to qualify for than more expensive loans, such as mortgages.
The downside to these bad credit car loans is that when not managed responsibly, the debt they can put you in can be extremely hazardous to your finances, similar to any personal loan. Since poor credit can make your interest rate go up, your regular payments can end up being very high. So, if you don’t keep up with your payments, your debt and credit will become even worse, and your car could be repossessed by the lender so that they can recuperate part of their loss.
Click here to learn how you can deal with your auto loan debt.
An even more common product for those with poor credit is the payday loan. Found in almost every state, payday loan lenders are there for borrowers who don’t even qualify with most subprime lenders. These loans can be appealing because they’re often for relatively small amounts, from a few hundred to a couple thousand dollars. All a potential borrower needs to be approved is proof of gainful employment. Their credit will not be checked and they aren’t required to have any assets. The reason they’re called “payday” loans is that they’re meant to be paid off within a typical pay cycle, which for the most part means two weeks.
Be extremely careful when you apply for a payday loan. While it’s true that these loans are easy to get and can be paid off relatively quickly, they come with extremely high-interest rates, sometimes as high as 400% APR (annual percentage rate). So, if you don’t manage to pay your full loan, including interest, back within the designated time period, your debt could grow to an unmanageable amount. In fact, you could end up paying hundreds, maybe thousands of dollars more for what was once small amount.
Debt Consolidation Loans
These types of loans can be very useful for borrowers whose credit is poor, but who don’t want to resort to more drastic measures, such as debt management programs, consumer proposals, and bankruptcies. Debt consolidation loans are granted by both prime and subprime lenders with the specific purpose of paying off multiple debts from multiple sources, using one larger loan. Types of debt you can pay off with a debt consolidation loan include, but aren’t limited to your credit card bills and smaller personal loans. These loans are usually meant to be paid off over several years through weekly, bi-weekly, or monthly installments, which can definitely be more beneficial than the time you would spend paying down multiple smaller debts.
Unfortunately, debt consolidation loans are not always easy for borrowers to qualify for. To get approved, potential candidates must have certain factors on their side, such as a decent credit score, high net worth and gross monthly income, possibly even assets or a more qualified person to co-sign their application. If you don’t have any assets, but still manage to get approved, the interest rate for your unsecured consolidation loan could be very high. Also, certain types of debts, such as mortgages, won’t be covered by a debt consolidation loan. As with any type of debt, if you manage it properly, you should have no problems. However, you should always speak to a financial advisor to find out if you qualify for a debt consolidation loan.
Simple Ways to Improve Your Bad Credit
The real downside is, that once your credit gets to the point where prime lenders consider it to be “poor”, it can take a lot of time and effort to improve it. However, if your credit products are important to you, it’s best to start making that effort as soon as possible.
Pay Your Bills!
The first thing you can do to improve your credit gradually is to immediately stop defaulting on your regular payments. Remember, every missed, short and late payment causes your credit score to drop. So, you should always try to make your payments for every product on time and in full to the best of your ability. When it comes to certain products, like credit cards, if you can’t afford to make your full monthly payments, maintaining the minimum payment balance is a way to at least see that your credit score won’t drop significantly.
Review Your Credit Report and Dispute Any Errors You Find
Your “credit report” is a detailed profile of all your actions as a credit user, whether actions are good or bad. The moment you start using credit products, no matter what they are, your lender will notify the credit reporting agencies, who will compile a credit report in your name. Whatever credit-related information and transactions are recorded within will remain on your report for a predetermined number of years. You are entitled to one free copy per 12 months from any of the three main credit agencies, which you can request via mail, online or over the phone.
Another way of improving your credit score is to request a copy of your credit report, then review it for any errors. Those errors could be anything from a mistaken address or misspelled name, to something as serious as a case of identity theft, where a fraudster has used your personal information to open fraudulent credit accounts. If you discover an error of any kind, you should inform your credit agency right away by filling out the disputation form found on their website. If the error turns out to be justified, the agency should correct it and you should see your credit score improving gradually.
Just make sure not to get stuck in a cycle of revolving debt!
Which Bad Credit Loan Should You Choose?
If you’re a borrower and your credit score is less than favorable, you may not qualify with a bank, credit union, or other traditional financial institution. However, there are many subprime and private lenders found online athat are willing to let you borrow from them, even with your bad credit.
In the end, the bad credit loan product you choose really depends on your own financial situation. Always consider the fact a loan can add to your current debt if you don’t manage it responsibly. In other words, you should always make your payments on time and in full to avoid any worse consequences. Nevertheless, the best thing you can do before you apply for a credit product of any kind is to speak with a financial expert for more information. In the end, the bad credit loan product you choose really depends on your own financial situation. For any further information, or if you’re looking for some much-needed financing, Rebound Finance is here for you.