Where to Start
Plenty of people need a personal loan and have bad credit. Situations that require extra money arise for many reasons, but for those who have bad credit, getting money from a lender can be a rather difficult process. Loan qualification and approval is usually limited to people with outstanding credit scores, above 650 in general. For the rest of us, it can be a hassle to find a fair-priced personal loan.
If you have bad credit, it’s not the end of the rope for you. Believe it or not, millions of Americans have credit scores rated as below average. While it’s nothing to be proud of, it’s important to know that if you have bad credit, you are not alone. There are ways to make it better, and there are ways to still get a personal loan.
Let’s begin with some ways to raise your credit score, because after all, the better the credit, the better the loan. Then we will move into some tips for “bad credit borrowers.” We will then cover the best personal loan options for those with bad credit.
Before any of that though, bear this in mind: Even though you might have a bad credit score, your actual credit history might not be bad. Maybe you don’t have much to report, because you didn’t start building any credit until recently, or maybe you’ve only ever had one line of credit. Whatever the reason for having a low score, just because your score is low does not mean you’re not worthy of being lent to. In today’s online age, lenders know that.
Five ways to improve that credit score
It’s been said before that improving your credit score is like losing 20 pounds because there is no quick fix. Improving your credit score takes time, effort, and usually money. There are five categories credit bureaus consider when creating your credit score. From most to least important: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%) and new credit (10%).
- Payment History – The most important factor of your credit score is your payment history. Credit bureaus want to see whether or not you have paid past credit accounts in a timely manner. Set a payment schedule so you’re never late.
- Amounts Owed – Owing money to a creditor is normal, but having too much money owed is a bad thing. If possible, pay ahead on your most outstanding bills. Again, there is no quick fix for bad credit, but the fewer amounts owed, the better.
- Length of Credit History – Credit bureaus will look to see how long you have had credit accounts open, and how often you use them. Generally speaking, the longer you have had accounts open, the higher your score.
- Credit Mix – Your credit accounts, retail accounts, loans, finances, mortgage (if applicable), and any other form of credit will be taken into account. This includes everything from your bank account to your Walmart credit card to your electric bill. Be sure to manage all of your accounts, as it is sometimes too easy to forget about one.
- New Credit – Opening too many credit accounts in a short period of time will negatively affect your credit score. Try and space out the opening of accounts.
Improving your credit score boils down to one process: accumulating and then reducing debt. Think about when your credit score is checked. It’s usually when some form of loan has to be taken out, as in for a vehicle, a new home, or a credit card. It’s easier said than done to reduce debt, but it is possible. Stop using your credit cards. Get a copy of your current credit report. List all of your accounts. Determine how much you owe on each account. Create a payment plan. Improve that credit score.
Five Tips for Personal Loans with Bad Credit
While it would be great to improve your credit score before you take out a loan, sometimes it’s not possible. The need for capital is usually a pressing need. If you have a bad credit score and you need money fast, you are not at the end of the road. Plenty of lenders work with bad credit. Fact is lots of people have bad credit, and the loan business isn’t going away anytime soon. Here are five tips for when you’re seeking a personal loan with bad credit.
- Stray away from high-interest schemes. Surely you’ve seen something like this before. There is a sign in the window of a shady building that reads “Payday Loans.” This, along with plenty of others, represents the world of high-interest rate personal loan schemes. They prey on folks with bad credit who need cash fast. Sometimes the interest rate can be above 30%. Make sure even when dealing with traditional lenders to ask about the interest rate. Oftentimes lenders raise the rate when lending to a borrower with poor credit.
- If possible, avoid borrowing from big banks. It is recommended to avoid borrowing from a loved one, so as to not put any strain on the relationship. However, individuals are available to borrow from. These people are known as microlenders. These private investors choose debts to invest in, and can sometimes help individuals who have been blacklisted by their bad credit.
- Get yourself a cosigner with good credit. By adding their name to the loan agreement, a cosigner is considered an additional means of repayment and can help someone with bad credit get a loan. Never add a cosigner unless everyone involved is comfortable with the agreement and understands what they are signing up for.
- Prove you aren’t as risky as your score. Say your credit score is really bad, but currently, you have lots of money in the bank, or your score is bad but you own four vehicles. Showing your income and assets to a lender can speak volumes. Credit scores take a long time to go up, even after satisfying a debt. If you can prove that you have enough money to clear your debt, a lender may look past a poor credit score.
- Fix your score! Repaying debts on time doesn’t happen overnight, but even making an effort will show to a lender. Also, some credit reports have errors that can be fixed only when noticed. Follow these tips before you decide to go get that personal loan.
Five Best Loan Types for Bad Credit
So you’ve gone about improving your credit score as much as you can, but it is still low. You’ve also committed to memory all of the above advice for when it comes to taking out a personal loan with bad credit. Now it’s time to do it. You really need that money, so where do you get it?
If you’ve been denied loans because of your credit in the past, you might think securing a personal loan is out of your reach, but don’t sweat it. There are more borrowing options than you might imagine. Many loans are available to those with poor or bad credit. Here are a few of your best options if you’re struggling to get a loan with your (currently) poor credit score.
- Home Equity Line of Credit – Before reading on, these loans are only available to people who own their homes or are at least 20% of the way along in their mortgages. If you happen to meet these conditions, a home equity line of credit (or HELOC) may be best for you. What you do is receive a line of credit from a lender with the house itself put up as collateral.
- The pros of a HELOC are the flexibility given when it comes to using the funds, lower interest rates than credit cards, and adjustable rates. The cons of a HELOC are the fact you must pay closing costs, your home as collateral, the line of credit can be canceled, and fees may be incurred if the line of credit isn’t used quickly enough.
- Bad Credit Loans – Yes there really are such things as bad credit loans. As mentioned, most bad credit lenders are out to charge the highest possible interest rates. However, the approval rate for bad credit loans is extremely high. While not recommended, bad credit loans can get you money fast. The pros of a bad credit loan are the acceptance rate for those with bad credit and the ease of preapproval. The cons are extremely high-interest rates and a limit to the borrowing amount.
- Credit Union Loans – The credit standards of banks is much higher than that of credit unions. Credit unions are non-profit, and therefore can offer personal loans and other financial services more readily than profit-driven banks. The pros of a credit union loan are relaxed standards, fewer fees, and penalties than banks and other traditional lenders, and the availability of unsecured loans (those without collateral). The cons are the limits on borrowing amounts according to credit score and shorter-than-average repayment periods.
- Peer-to-peer Loans – Also known as microloans, this newer method involves an individual lender dealing with an individual borrower. Acceptance rates are usually higher than those of banks. Think of it as the craigslist of personal loans. There are peer-to-peer lending sites, as well as individual lenders. These loans allow borrowers to stray from the stresses of bank loans. The pros of peer-to-peer loans are the high acceptance rates, lower interest rates than credit cards, an opportunity to explain person to person why your credit is bad, and higher borrowing amounts. The cons are possibly strict qualifications, having to use multiple lenders, possibly high-interest rates, and a longer-than-average waiting period for funds.
- Cosigned Loans – As discussed, it always helps the poor-credited to have a cosigner with good credit. Make sure your cosigner is aware of the facts that you have bad credit, and that they are equally as responsible as you for repayment if the loan defaults. The pros of cosigned loans are that you can escape the effect of a bad credit score, a lower interest rate than without a cosigner, and flexible loan terms. The cons are putting someone else’s credit at risk and the difficulty in finding the right cosigner.
The Bottom Line
Remember that just because you have bad credit doesn’t mean it will stay that way forever. In fact, with good discipline, you’ll be able to raise your credit score over time and earn better terms on loans. By paying your debts on time and in full whenever you can, you’ll climb your way out of having bad credit. The best place to start is your credit report. Then start right at the top of this article. Good luck.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.