In the world that we live in today, economic times are tough, and cash is a limited resource. For this reason, you may not always have money sitting in your bank account enough to fund big emergencies, home improvement projects, business expansion, or investment opportunities that pop up unannounced.
There comes a time when you have to borrow money to be able to fulfill your various needs or ambitions and pay it back later, of course, at an interest. However, getting approved for a traditional loan when you have bad credit can be a nightmare in the making.
Today, at least one out of every three Americans has a poor credit rating. This, in a way, has created a loophole in the lending industry, for private investors, while also increasing competition amongst banks and lending firms.
For consumers, all is not doom when you have a terrible credit rating… you have a reason to smile. But still, you’ll be better off approaching your bad credit lender equipped with the right knowledge so you can make an informed decision. On this note, here are things you might not know about getting a loan with bad credit.
1. What Is Bad Credit?
Whether you have good or bad credit depends on several factors, including your credit history. Your credit history is an account of how you’ve been handling your previous debts, and this determines your credit score.
While late payments, defaulted payment, delinquency, bankruptcy, and foreclosure injure your credit score, paying or clearing your debts on time improves your credit score. In the US, for instance, your credit score can be anywhere between 300 and 850, according to FICO, which is why some like to call it the FICO score.
If you have a credit score of 670 and above, you lie between good and exceptional. Your credit score is considered fair if it’s between 580 and 669. However, anything below 580 is a poor credit score, which is what bad credit means precisely. As a matter of fact, some lenders will consider you a high-risk borrower if your credit score is below 670, and you may have trouble getting approved for a loan in this situation.
2. It Can Help Improve Your Credit Rating
When they’re deep in debt, and it becomes unmanageable, many people tend to completely shy away from borrowing. They’re afraid of the constant humiliation from cold calls by creditors and debt recovery firms, and other similar experiences from the past.
However, did you know that lenders submit periodic reports of their borrowers to credit bureaus? Yes, in most places, it’s a requirement by the law. This means that as long as you manage to secure a loan with bad credit, it can actually work to the advantage of your credit rating.
Financial advisors at Loanry, an online marketplace that connects lenders and borrowers through their website, www.loanry.com, say that one of the significant benefits of getting a bad credit loan is that it can help rebuild your credit.
All you have to do is choose your lender wisely and take what you can comfortably manage to repay with minimal strain. When you secure that personal loan, all you have to do is make sure you stay on track with your payments, avoid defaulting, and you could see your credit score improve within not so long.
3. You Have Several Options
Unlike in the past years, when securing a loan was an incredibly taxing process, things are much easier these days, even for applicants whose credit rating is wanting. From payday loans to title loans, hard money loans, peer to peer, cosigned loans, and loans on retirement accounts, your options for borrowing with bad credit are endless.
However, a private lender or a credit union is more likely to approve you for a loan with bad credit compared to banks and traditional lenders. Additionally, things such as the loan term, loan limit, requirements, approval time, and interest rates may vary from one lender to the other, which makes it essential to do your research right before picking a bad credit lender.
4. The Loan Can Be Costly
By approving you for a loan when you have bad credit, the lender is basically risking a lot. For this reason, it is highly likely that when getting a bad credit loan, you’ll pay a few times more in interest for the same amount of money than you would have if you had a good credit score.
And there’s nothing wrong with this since even some traditional lenders are known to grant loans at lower interest rates to individuals whose credit scores are very good to exceptional. The harsh truth, however, is that with a poor credit score, interest rates can be extremely high.
In addition to this, some bad credit loans may require you to provide collateral. When getting a title loan, for instance, you would need to provide your car title alongside an agreement that allows the lender to claim a lien on your car in case you’re unable to repay.
For a hard money loan, on the other hand, your lender will ask for real estate property as collateral. The lender can sell this property to recover the loan principal along with interest and any penalties or fees attached to it.
5. Online Loans Can Be A Good Alternative
Thanks to today’s technological advancements, even consumers with bad credit can access loans from the comfort of their homes. If you guessed right, we’re talking about online lenders here. There are many reputable online lenders that you can try, but be sure to do your homework well, shop around, and be on the lookout for scams and shady lenders out to prey on needy consumers like you.
Your credit history and credit score are vast determinants of whether or not you qualify for a conventional loan, how much you qualify for, and if approved, how much interest you should pay on loan awarded.
For a bad credit loan, your credit score is of lesser concern. The interest may be a ton a bit higher, but the chances of getting approved are also high and convenient. A bad credit loan can also help you get back on track as far as your credit is concerned. With the above few tips in mind, borrowing when you have bad credit can hopefully be less frustrating for you.
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