Author: Michael Dinich
If you have bad credit and find yourself in a pinch, you might think that you can’t get a loan. While it is more challenging to get a loan with bad credit and even harder to get a good rate, you have options. Here is everything you need to know about what loans you can get with bad credit and how to get them.
What is a Credit Score?
Credit scores are a number between 300 and 850 that reflect your likelihood to repay a loan based on your credit history. Your credit history is a mix of how much you have borrowed in the past, how many loans you’ve taken you, and if you’ve paid your loans back regularly. The higher your score, the more likely a lender thinks you are to repay a loan. In general, a score over 700 is considered a ‘good’ score. The generally accepted credit rangers are:
- Excellent – 800 to 850
- Very good – 740 to 799
- Good – 670-799
- Fair – 580 to 669
- Poor – 300 to 579
How Bad Scores Affect Borrowing
Banks and other lenders do not want to loan out money that is not likely to be repaid. To protect themselves from lending to people who might not pay their loans back, they make loans more difficult to access for people with low credit scores. They do this by raising interest rates for people with bad credit or simply refusing to lend to them. Therefore, it is in your best interest to raise your credit score as much as possible before applying for a loan. This will help you to qualify for more loans and get lower interest rates on them. You can raise your credit score by making regular payments on your existing debt and working towards eliminating it.
What Loans Can I get With Bad Credit?
If you have bad credit, be sure you do your research before taking out a loan. You will want to be sure that you can pay your loan back and that the interest rate isn’t too high. Depending on how much money you need and what you will use the money for, there are several ways for people with bad credit to get a loan.
Note: Even if you experienced a bankruptcy, you might still be able to obtain a loan, here is a guide rebuilding your credit after bankruptcy.
Credit Union Loans
Credit unions are nonprofit organizations that are owned by their members. Credit unions are like banks in that they can lend money and allow members to have savings funds, checking accounts, and other investments with them. However, you must apply to join a credit union and are regarded as a member. They are typically local nonprofits rather than national institutions.
Because credit unions do not have interest in third-party shareholders like banks do, they can use their revenue to provide lower interest rates and fees to their members. Therefore, you might get a much lower interest rate at a credit union than at a bank (I actually used one when buying my house). Credit unions have an interest rate ceiling of 18% for all loans except short-term small loans, which can charge up to 28% interest, whereas banks do not have a ceiling. These lower interest rates can come in handy when repaying your loan.
For example, if you take out a loan of $10,000 with a three-year term at 18% interest from a credit union, you will pay back $13,014 over the three years. If you took out a similar loan from a bank at 36%, you would pay back $16,489 over the three-year term.
Home Equity Loan
If you need money now and own a home, you might also be able to take out a home equity line of credit or HELOC. Often called a second mortgage, you might be able to use your home as collateral to get access to cash. These loans typically have low-interest rates, and you will make monthly payments alongside your mortgage until the balance is paid off. It is important to remember that if you use your home equity and can’t pay back the loan, you could lose your home. Before you decide to take out a home equity loan, make sure that you will be able to make the additional payments.
Peer-to-peer (P2P) lending is a relatively new form of borrowing. This option exists exclusively online and allows individuals to borrow from another individual, group of individuals, or an institution. If you are considering this option, you’ll simply log in to a peer-to-peer website and post how much you need and what you’ll use it for. Investors will then have access to loan listings and can choose who they want to fund.
You will need to post your credit score, but because people rather than banks are evaluating whether to lend to you, your credit score is less important in this case. You might end up paying higher interest rates, but your rates will be fixed and do not require collateral. The most popular peer-to-peer lending platforms include LendingTree and Prosper.
While payday loans are designed for people with bad credit, it is best to avoid them. They provide a cash advance against your next paycheck, typically with interest rates exceeding 300 percent. This means that you give the lender access to your bank account to withdraw your next paycheck. If you fail to pay or your paycheck does not come in, you could end up being responsible for three times what you borrowed.
The worst part about these loans is that when you borrow money, you’ll be required to pay them back with your next paycheck. This means that you won’t have any money to spend and might be doomed to continuing the cycle of taking out a very risky loan every couple of weeks. This is a cycle you should avoid at all costs.
Credit Card Cash Advance
If your credit card allows it, you might be able to get a credit card cash advance. However, this option can be expensive. Unlike regular payments on your credit card, interest starts accruing on cash advances immediately and at a higher interest rate. There is also typically an upfront fee of at least 5%. To get a credit card cash advance, you can take your card to an ATM or bank branch that your credit card is issued through. You’ll need to provide your PIN if you have one. Then, you’ll want to start paying off your cash advance as quickly as possible.
How to Get a Loan with Bad Credit
Before you decide to take out a loan, ask yourself if it is an emergency. For example, if you need money so that you do not get evicted from your home this month, you might want to take out a small loan with a high-interest rate to get you through the month. However, if you have poor credit and want to take out an auto loan, you might want to work on raising your credit score before taking out a loan. Here are the steps you can take to get a loan, even with bad credit.
Raise Your Credit Score
If you have time, the first step to getting a loan is to try to raise your credit score. You can do this by:
- Make on-time payments. Pay every monthly bill on your existing debt on-time and in-full.
- Keep your balance low. You should strive to use less than 30% of your available credit and pay off as much of your existing debt as possible.
- Do not apply for new lines of credit. If you plan to take out a large loan such as a mortgage or auto loan, refrain from taking out new credit cards or other lines of credit.
Collect Your Documents
You can use more than just your credit score to qualify for a loan. This is especially important if you have no credit due to bankruptcy or never taking out a loan in the past. Therefore, it is essential to collect the following to help prove your creditworthiness:
- Your most recent W2 and 1099 forms, as well as at least two years of tax returns
- Details of your job history and income
- List of your current assets and any debts you have on them. This might include your home, car, or other property.
- List of any unsecured debts including credit cards and medical bills
- Any other income including investments, alimony, and other
- Bank balance statements
- A written explanation for any credit problems including documentation of outside factors such as job loss, divorce, or other
Understand Your Loan Options & Choose the Best One
Once you have improved your credit and collected the documents, you’ll need to apply for a loan or line of credit, take the time to understand what options are available. It is often the case that the first loan you find that you qualify for is not the best option for you. Take the time to see what loans you qualify for. Then, weigh out the pros and cons of each. You should evaluate how much the payments will be, how long the loan will take you to pay back, and how much you’ll pay total. Once you’ve weighed all your options, you can choose the one that will best align with your priorities. You might want to choose the one with the lowest monthly payment or the one that costs you the least over time.
The Bottom Line
Bad credit can be tough to dig yourself out of, but it is not an end-all situation. Depending on how much money you need and how quickly you need it, there are several options available. It is essential to be cautious that when you borrow, you’ll be able to repay your loans. You do not want to dig yourself further into debt or decrease your credit score even further. Be sure to do your homework before taking out a loan. While borrowing with bad credit can be difficult, it can be done. The best way to get a loan is to be diligent, work to improve your credit, and evaluate your options.
This article originally appeared on Your Money Geek and has been republished with permission.