What are Bad Credit loans?
Updated: Oct 22, 2020
Bad credit refers to a low credit score or a short credit history. Things like late payments or maxed out credit cards can lower your credit score.
Bad credit loans are an option for people whose credit reflects financial missteps or people who haven’t had time to build a credit history. These loans are either secured backed by collateral like a “home or a car.” while your creditworthiness backs unsecured. Interest rates, fees, and terms for these types of loans vary by lender.
Various banks, credit unions, and online lenders offer loans to those with weak credit, but the threshold for what’s considered a “creditworthy borrower” varies by institution. Some lenders have stricter requirements than others, making it essential to shop around thoroughly when looking for a loan.
What is a bad credit score?
There are a few credit scoring models that you can use to check your credit score, but the FICO credit scoring system is one of the most popular. FICO scores range from 300 to 850, with the scores on the lower end considered poor or fair.
According to FICO, a bad credit score is within the following ranges:
Fair credit 580 to 669.
Poor credit 300 to 579.
Having a low or fair credit score can impact your ability to get approved for a loan and can even affect your ability to rent an apartment or purchase a home. If you get approved for a loan with bad credit, you'll likely be paying the highest interest rates and higher fees. However, there are long term habits that you can develop to improve your credit score, like paying your bills in full every month and regularly checking your credit report to catch errors.
FICO calculates your credit score using five pieces of information: Payment history (35 percent). Amounts owed (30 percent). Length of credit history (15 percent). New credit (10 percent). Credit mix (10 percent).
If your finances fall short in one or more of these areas, your score will drop. For instance, reporting a history of late payments will have a significant impact on your credit score, since payment history contributes the most to your score. Things like bankruptcies, foreclosures, and high debt to income ratio will result in a bad credit score.
If your credit is exhibiting all the above symptoms, you might ask yourself, How can I get a bad credit loan?.
Getting loans for bad credit isn’t impossible, but it requires diligent research to find the most affordable loan possible. Here are a few steps to get a personal loan if you don’t have strong credit.
Check your credit score. Learn how your credit stands by requesting a free credit report from AnnualCreditReport.com. You are entitled to one free credit report every year from each of the credit reporting agencies and bear in mind that you can still access weekly reports through April 2021. Credit Karma.com and freecreditreport.com let you view and monitor your credit score for free.
Ensure that you can repay the loan. Evaluate your income and budget and make sure that you are spending less than 40% of your pay to ensure that you can support an additional monthly loan payment.
Compare bad credit personal loans. If you have an existing relationship with a bank or credit union and your accounts are in good standing, they might have a unique loan option for your category. You can also research personal loans for bad credit online, but educate yourself with the process and read the fine print and independent reviews about the lenders.
Take advantage of prequalification. Before you apply for a loan, sign up with www.optoutprescreen.com and list yourself in the public file records, this is a great way to get prequalify without another hard inquiry on your credit. Many online lenders allow you to check whether you will qualify without pulling a hard credit check is an excellent way to shop around for a bad credit loan without impacting your credit score further.
Look into secured loans. Some lenders offer secured personal loans, which are often easier to get for people with below-average credit. These loans must be backed by an asset like your home or car, but they typically have lower APRs.
Use a co-signer if necessary. Co-signers assume equal responsibility for the loan and are required to pay back the loan if you fall behind on payments or unable to pay it back. However, adding a co-signer with good credit could help you qualify and may net you significantly lower interest rates.
Gather financial documents. When applying for a loan, you'll likely have to provide pay stubs, tax documents, employment information, and Bank statements. By gathering all of these documents in advance, you'll speed up the process of acquiring your loan.
Be prepared for a hard credit check. While you can get prequalified with many lenders without initiating a hard credit check, the actual application will result in one of these checks. A hard credit check can temporarily damage your credit, though you will recover the points lost once you begin making payments on the loan.
In today's financial climate, research is vital; one of the most important things you can do to protect your financial health is to do your research before applying for a personal loan, especially if you have bad credit. “I can’t stress enough the importance of educating yourself as a consumer and finding the right financial product to assist you with your goals.” Leslie Tayne, a debt resolution attorney, says: “A low credit score does mean you have limited options, but it doesn’t mean you don’t have many options. Some products assist borrowers with low or bad credit.”