The Complete Guide of Bad Credit Loans
Poor credit happens to the best of us. We all experience financial mismanagement and difficulties in life. These are some of the reasons why we have bad credit loans.
The good news is you can get a loan even with poor credit! As long as you make on-time monthly payments.
There are many loan options available to you even if you have bad credit. They can be a lifesaver when necessary. Read on to know more!
What Is Bad Credit?
Bad credit refers to a person’s track record when it comes to paying bills on time. This will result in the likelihood that they will fail to make timely payments in the future.
It happens to everybody for different reasons. Cars, holidays, student loans, and debt consolidation loans. These often reflect a low credit score.
There are even large companies that have bad credit due to current financial situations.
Bad credit borrowers are those who have a hard time borrowing money or get a credit card.
What Are Bad Credit Loans?
Having a bad credit score limits your loan options. Online lenders have tightened the approvals in this COVID-19 economy. Credit score requirements are a bit stressful.
People with good credit need loans for the same reason as people with bad credit.
Reasons such as:
- Home improvements
- Car repairs
- Student loans
- Other unexpected expenses
The good news is that borrowing money when you have a bad credit rating isn’t a dead end.
But you have to embrace the fact there are trade-offs to doing this.
Bad credit loans give you access to a higher interest rate loan amount. These high-interest rates don’t apply to borrowers with good credit history.
So you have the basics down, but what about credit score, what qualifies as good and bad? Let’s find out.
What Is Credit Score?
Your credit score is an essential metric in your financial life.
If you are applying for a mortgage, a new credit card, or a personal loan, you must know your credit score first. Checking online is a STRAIGHTFORWARD process.
You’ll have an idea about the products you can qualify for, the loan amount, and what interest rates apply.
It’s good practice to check your credit scores regularly. It’s the only way to keep track and improve your score.
It also alerts you of potential fraud or error reports.
Catching these issues early gives you a head start in resolving them.
What Does It Mean to Have a Bad Credit Score?
Having “bad credit” means you have a low FICO credit score. The FICO credit score determines your creditworthiness.
Online lenders use a minimum credit score to assess if they will extend the loan amount to you.
Loan lenders have a minimum credit score requirement to qualify for a bad credit loan. If your credit score is weak, it’s a big risk to the lender.
This is why the loan company will give you a fixed interest rate and higher than average.
A standard loan term is two to five years. Lenders charge annual percentage rates or APR up to 36%.
If you default on loan terms or miss some payments, your scores fall. Bankruptcy, judgments, and other public records also affect your scores.
Your Actions Affect Your Credit Score
Recognize that financial behaviors impact your scores regardless of financial milestones. The following are factors that impact your credit scores:
How Many and What Types of Accounts Do You Have?
Credit scoring models are the many different ways of calculating scores. These factors in the mix of different types of credit you have.
Things like credit cards, mortgages, personal loans, home equity loans, and store accounts. Too many credit accounts or not having a mix of different types could impact your credit scores.
How Many New Accounts Have You Opened?
If you open too many accounts at once, it could show you will take on a lot of new debt.
Credit scoring models look at your activities – new accounts you’ve opened recently or new accounts you applied for.
It gives the potential lender or creditor a sign of greater risk.
Do You Have Any Reported Delinquencies?
We’re talking about an event in your life where you’ve gone through a reversal of fortune. Bankruptcies, short sales, or completed foreclosures are not good for your credit profile.
This negative information will reflect on your credit history for several years.
How Old Are Your Credit Accounts?
Lenders would like to see how you’ve handled your accounts over time. New accounts will lower your account age and impact your score.
A long history of credit accounts with responsible credit behavior is a good sign.
Are Your Balances High Compared to the Total Available Credit Limit?
If your credit cards are near the credit limit, it tells creditors and lenders that you have too much debt.
They prefer to see a lower debt ratio. This is the amount of credit you’re using compared to the total amount available to you.
What Doesn’t Impact Your Credit Score?
There are a lot of things that don’t matter when it comes to credit scores. There are common misconceptions about what affects them and what doesn’t.
To make it clear, these don’t impact your score:
- Equity in your home
- Net worth
- Retirement account balance
Your credit scores do not consider anything that shows how much money you have or how much you are worth.
Other factors that don’t affect credit score:
- Marital status
- Employment history
- Where you live
- Total assets
- Political affiliation
Know Your Credit Score Range
A credit score is a three-digit number that ranges from 300 to 850. It’s the result that comes out with the analysis of your credit file.
It’s the magic number that tells online lenders if you are a potential credit risk. It shows if you have the ability to repay loan terms.
It depends on factors such as payment history from your current and past accounts.
FICO credit scores are FREE and available through your bank or credit card company.
These are the FICO credit score ranges:
- Excellent: 800 and up
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 579 and lower
It’s easier to achieve personal and financial goals in general if you have a good credit score.
It spells a big difference when you want to qualify for a car loan or a home mortgage loan. It impacts how much you have to pay in interest and the payment fee once you’re approved.
Getting a Loan With Bad Credit
Although a few lenders might not consider giving you a loan if you have bad credit, the vast majority will.
It’s not impossible to find a lender.
You can get quotes from local and online lenders. Compare loan amount offers from at least three, so you don’t get overwhelmed.
They’ll give you competitive interest rates because you’re considered a high-risk borrower.
They will ask for more information while they review your application. Once they’re done with the process, they’ll give you a final decision.
What Should I Do in This Situation?
Be ready to provide them the necessary information about yourself. They will ask you for your Social Security Number, address, and phone number.
DON’T HESITATE to ask lenders for clarification.
In some companies, the process is fast, and you can get same-day loan funding. The lender transfers the loan amount to your bank account right after loan approval.
Types of Loans for Bad Credit
You can choose from many types of loans. Some have a higher risk than others, but you have the freedom to choose which one you prefer.
You may want to compare these loans if you have bad credit.
Personal Loans for Bad Credit
Personal loans for bad credit are the safest option compared to other online loans. Loan companies have a fixed rate of about 36%.
You can repay this loan amount in set amounts over a few years.
Check the lender’s smallest loan amount to make sure it meets your needs. You can find small personal loan amounts and large ones.
A bad credit personal loan is generally an unsecured loan. This type of loan means you don’t have to put down collateral.
What If You’re Not Qualified for an Unsecured Loan?
The lender will need to use your car or savings account as a valuable asset.
Collaterals like this help you get the approval of a secured loan. Should you default, loan companies can claim your asset to pay off your loan amounts.
Personal loans for bad credit are for credit card refinancing.
Lenders pay your credit card company. Or you can do the debt consolidation payments using the loan proceeds.
For those who need quick access to cash, payday loans have a reputation as “predatory loans.” It’s specifically designed for people with bad credit so it’s best you avoid this.
Unfortunately, consumers who have poor credit scores also have few options.
So they “take the bait,” so to speak.
Payday loans are short-term loans to cover expenses until you can pay them back on your next payday. They have smaller loan amounts.
It uses your paycheck or bank account to approve your loan. This is the easiest loan to get if you have bad credit.
Loan amounts are much smaller than personal loans. But you have to pay them back in weeks, not years.
Why Are Payday Loans Dangerous?
Interest rates and other fees are high, as high as 300%. These rates cost more in interest charges than the original loan amount.
And that’s NOT the ugly part.
You’re required to give them FULL ACCESS to your bank account. They will withdraw the loan amount when your next paycheck comes in.
People get trapped in a cycle of debt until they default.
Alternative Installment Loans
They look like personal loans for bad credit but resemble payday loans.
This is because of the high-interest rates and “predatory fees.”
Payday alternative loans or installment loans are often fast to get. They have longer repayment terms and have fixed monthly payments.
They give you more time to pay than a payday loan.
But expect steep interest rates when you choose this kind of installment loan.
Peer-to-Peer Loan (P2P)
Peer-to-peer is another way to borrow money like traditional personal loans.
But if you qualify, the money isn’t issued by a lender or a bank. An investor or a group of investors usually lend you the loan amount.
Every investor and network has its own approval criteria. You may need a score of 600 or higher for loan approval.
To apply, you will need to submit an online application through a website. The website connects potential borrowers to investors.
But before you commit or even apply, you need to do your research. Learn more about the options they will give you. Compare loan amounts with other installment loans.
Consider the amounts, fees, and terms you’re offered.
They sometimes feature relaxed approval criteria rather than traditional bank loans. But as a tradeoff, you face higher rates and fees.
Other Types of Loans
Credit Union and Banks
Banks and credit unions are institutions that are primarily credit score-driven. They won’t approve your loan application if your score is below 580.
Between a bank and a credit union, credit unions are the better of the two especially if you have money on deposit with them.
They offer lower fees and higher savings rates. It has more of a personalized approach to customer service to its members.
In addition, these lenders offer lower rates on loan amounts.
It may be easier to get a loan with a credit union than a large bank.
However, a credit union usually grants loans if you have a cosigner. Also, they don’t go below the level of their credit score cutoffs. This is one thing you need to consider.
Subprime loans are mostly a consideration with auto loans.
Car dealers will put you with one of these lenders if you don’t qualify for a bank loan or credit union loans.
If you need a car and there’s no other lending choice, this may be a necessary option for you.
They’re known for steep interest rates and extended loan terms (up to 84 months). This is the reason why people end up owing more than their car’s worth.
Before you decide which loan type to apply for, compare which one will work for you. Consider the following criteria when choosing an online lender:
Bad credit loans have high-interest rates compared to good credit loans. To find the most affordable loan, compare it with other offers.
Important Ways to Measure Loan Cost:
- Monthly Payments
See if your budget can afford a loan’s monthly payment by using a personal loan calculator. You can see your personal loan’s monthly payments with any rate and term.
When you pre-qualify, lenders show you this information. Consider cheaper alternatives if a loan’s monthly payments will overextend your budget.
- Annual Percentage Rate
This is similar to its interest rate but includes fees a lender may charge, like a prepayment fee. Affordable loans should have an APR (Annual Percentage Rate) below 36%.
Loan Eligibility Requirements
Other factors to consider:
- Monthly cash flow
- Steady income
- Employment history
- Other debts
Lenders have a minimum credit score requirement of 620.
They also have a minimum income requirement. If you don’t have enough annual income, it’s not a problem.
Lenders will consider your income from your current employment.
This will show your ability to repay the loan.
They compare how much you earn with how much you owe every month. They recommend having a stable income to compensate for bad credit.
The maximum debt-to-income ratio is 45%.
Getting the most affordable loan is a priority. Make sure to compare interest rates when you consider getting a loan.
The higher the credit score, the lower the rates.
Lenders offer fixed interest rates, not variable interest rates.
The rates remain the same for the duration of your loan with a fixed interest rate.
A loan with a variable rate has an interest rate that can fluctuate. The rate moves in tandem with an index rate.
You’ll receive the terms of the loan when you’re pre-approved for a loan.
The loan term includes:
- Loan amounts
- Loan period
- Annual percentage rate
You might want to review these before accepting the loan terms. Make sure you can make on-time payments, and you’re comfortable with the terms they give you.
A longer-term has lower monthly payments, but the interest as a whole costs more.
Lenders will give you a three or five-year term. Loan terms for personal loans are between two and seven years.
Fees and Penalties
Fees and penalties apply when you get a loan.
You could get charged with the following fees:
- Processing fee
- Prepayment fee
- Origination fee
- Late fees
- Insufficient funds
- Returned check
Some lenders charge a prepayment penalty fee. This happens when you pay off a loan early.
This fee is the percentage of the remaining balance. Or the interest charge for a certain number of months.
What If You Are Late?
You have to pay a late fee.
Lenders give a grace period of 10 or 15 days before they charge you a late fee. Late fees range from $15 to $30.
Sometimes it’s $15 or 5% of your monthly loan, but some personal loan lenders don’t charge late fees.
Some lenders charge an origination fee when processing the loan. An origination fee is an upfront fee charged by the lender for processing a new loan application.
The origination fee is compensation for executing the loan. A loan origination fee is a percentage of the total loan.
Others don’t charge an origination fee because it varies from state to state.
Fast Approval Process
There are a lot of loan applications with a fast approval process. Some can take a week to get a loan, but some can give you a same-day approval.
During the approval process, they will ask for a lot of documents. Your loan’s funding time will depend on how fast you submit the documents required.
Funding time shouldn’t outweigh affordability when you’re comparing offers.
Consider choosing a lender that will share your FICO score with you for free.
If you have bad credit, they should offer financial education for you to learn how to build a credit score.
How Can You Get a Loan With Bad Credit?
If you do some homework, you’ll get the best deals for a personal loan. You can qualify for a personal loan with bad credit by doing the following:
Check Your Current Credit Report
This is the first thing you need to do before applying for a personal loan if you have poor credit.
Address any errors that could drag down your credit score. Identify areas of improvement.
You can get a free credit report from credit bureaus. Disputes with credit bureaus can take about 30 days.
Credit history and scores help lenders predict if a person will pay a debt as agreed upon.
Check your credit report score for the past three months before applying for a loan. Pay off a revolving credit line or collection account that exceeds the 30% limit.
You should try to bump your credit score to several points.
This gives you the chance to qualify for a loan with a lower interest rate.
Look for the Best Interest Rate
Take your time to shop around for the best interest rate.
A personal loan is a big decision, so you need to find lenders that offer preapprovals.
Preapprovals don’t affect your credit score. The interest rate quotes they provide uses a soft credit inquiry. A hard credit inquiry can affect your credit.
Pre-approvals are a good way to compare bad credit loan interest rates before you apply. It doesn’t trigger a hard inquiry right away.
Applying for a loan can take one business day to a week and triggers a hard credit inquiry.
It will hurt your credit score temporarily but should rebound over time as you pay your loan. You should have just one hard credit inquiry.
It’s best to get preapprovals from multiple lenders with soft credit inquiries first.
Beware of Scams
Spotting bad credit loan scams is difficult. Sometimes it’s hard to identify a scam among legitimate online lenders.
But there a few signs to help you distinguish scammers:
- They ask you to pay with a credit card
- They start contact with you and call you nonstop
- They ask for fees upfront
- They ignore your payment history
- They don’t have a license in your state to make loans
Pay Down Debt
You would want to pay down some debt first to increase your credit score and your debt to income ratio.
If you have credit card debt, pay down your balance up to 30% or less than the available credit limit.
Gather and Prepare Your Documents
Lenders will ask for proof of employment or income as well as your Social Security Number. Speed up the process of your application by having pay stubs, tax documents, and W-2s ready.
Consider Having a Co-Borrower or Collateral
If you can’t qualify for a loan, the lender will need you to add a co-signer.
If your co-signer has a good income and strong credit, you’ll get better terms and a lower interest rate.
In case you default, your co-signer will be an additional assurance. The lender knows he will make payments on your loan.
The downside is, it could bring about a lot of stress or even damage your relationship with your co-signer.
You must both understand the consequences of this arrangement. Borrowing from family and friends can permanently destroy your relationships.
If having a co-borrower is not possible for you, you can add collateral or a secured loan.
A vehicle is a good collateral for your loan application. With this secured loan, the lender can take your collateral.
Make a Budget for Your Loan Repayment
When you’re getting a personal loan, it helps to know your budget.
The budget includes:
- Savings goals
- Basic living expenses
- Credit card debt
- Your loan payments
Come up with a plan to make all your payments on time.
Figure out how much you need to borrow.
Consider the loan amount and your repayment period. Check how much you can afford to pay monthly and how much the fees are.
The longer you need to pay the loan, you get more interest + lower monthly payments. Whether your loan has a variable or fixed rate.
Your monthly payment is definitely affected by your annual percentage rate.
Repay the Loan
Once the lender offers to fund, you are now responsible for making on-time payments.
Avoid late fees because these might give you a negative effect on your credit history. Your credit profile will also suffer.
Delaying payments reduces your ability to get credit in the future. Make sure you can afford to make the payments every month before applying.
Common Bad Credit Loan Requirements
You need to furnish certain documents when you apply for personal loans. It varies from lender to lender and one type of loan to another.
These are the typical documents they need from you for personal loans:
- Social Security or pension income (award letter or 1099)
- Employer’s contact information (the lender will verify your employment with them directly)
- Recent pay stub and W-2(s) to document your income.
- If you’re self-employed or work on commission. Copies of completed income tax returns for the past two years
- VIN (Vehicle Identification Number) if you’re applying for an auto loan. Including the make, model, and value of your car
- The listed amount you’re paying or receiving for alimony or child support
- Retirement account statements, bank or brokerage statements
- Written explanations for certain problems. Documentation for extenuating circumstances (medical events, job loss, divorce, etc.)
What to Do If You Get Denied a Loan
So you got denied. It’s not the end of the world!
You’ll need to decide if you want to apply for a loan somewhere else. Or…if you can wait till you improve your creditworthiness.
Getting denied a loan doesn’t hurt your credit. But each new application results in a hard inquiry. That’s what we should try to avoid.
Waiting makes more sense after getting denied. But if you want to submit more applications, proceed with caution.
Try to get prequalified with a soft inquiry first. Then increase your scores or income.
Or pay down other debts first before you consider getting a loan.
You Can Improve Your Credit
If you have good but not great credit, it’s time you focus on improving them.
Bad credit forces you to find loans in the most unlikely places, and you don’t want that to happen. But let’s say you already have bad credit.
What Is the Best Borrowing Strategy?
The best strategy is to improve your credit before you apply for a loan.
It takes months, even years, to start improving credit. There’s no fast and easy way around it.
Avoid shortcuts like credit repair services. They’ll charge you so much without significantly improving your credit.
Here are some options you should check out:
Get a Copy of Your Credit Report
Pay close attention to any derogatory information it has.
Contact your creditor right away to resolve any reported error in the information. You’ll need to provide information to prove that there’s an error in the entries.
Make sure that your creditor reports accurate information to the credit bureaus.
Find a Legit Credit Repair Service
You can try using Experian Boost. It’s a free alternative to costly and fraudulent credit repair services.
Experian Boost is ideal for people who want to increase their credit score but don’t have the time and money.
Pay off Past Due Balances
Get a written confirmation from the lender on the settlement.
If you have a larger balance, see if the creditor accepts a smaller amount in full payment of your balance due.
Pay at least the minimum payment due on time.
A single late payment will hurt your credit scores and will stay on your credit report for seven years.
Reach out to the creditor right away if you think you’ll miss a payment. See if you can both work out something in your favor.
Keep Your Credit Card Balance Low
Gradually pay your card. High credit card usage is almost as bad as having late payments.
Credit utilization rate is important. It compares the current balance and credit limit of your card.
Having low credit use helps your credit scores. Excellent credit scores have an overall utilization rate in single digits.
Apply for Credit Only When You Need It
Avoid applying for new loans until you improve your credit. Also…
- Too many credit inquiries can also hurt your credit score. It can lead to a hard inquiry.
- Keep unused credit cards open (don’t close them), and don’t open new accounts you don’t need. Both moves will damage your credit score.
- Don’t apply for too many different types of credit cards and loans during a short period of time. This leads to a large score drop.
Open Accounts Reported to Credit Bureaus.
If you have few credit accounts, make sure those you open adds to your credit report. These are installment accounts such as credit cards and other lines of credit.
If you can’t get a regular credit card because of bad credit, get a secured credit card.
This is similar to a bank debit card. It allows you to spend only the amount you have on deposit.
Making timely payments on a secured card will help rebuild a bad credit rating. You can also qualify for a regular card eventually.
It’s a good way for young adults to begin to establish a credit history.
Set Up Automatic Online Payments
Setting up automatic online payments is a breeze! You can do this for all your credit cards and loans.
Get on the email or text reminder lists provided by the lenders as their service. It appears in their advertiser disclosure.
It helps to ensure you pay at least the minimum amount on time every month.
The Bottom Line
Poor credit history creates a wide range of consequences. It’s not just about fewer loan options and higher interest rates.
It would be difficult for you to buy a house or a car. It can also go against you when you’re trying to find a job.
Many people might be experiencing these credit problems, but you can still avoid these if you are willing to put in the work.
There are available options and affordable solutions.
If it’s been a while since you took a peek at your credit report, it may be a good time right now to see where you are at.