You may have seen the advertisements all over, telling you that having bad credit or no credit at all is no problem at all. Well, don’t believe it one bit. There will always be a problem getting a personal loan when you either have bad credit or no credit at all. It is a problem that you can solve, but it is a problem, and we need to acknowledge that before we move forward.
To be honest, having bad credit means you pose a high risk to banks and other lending institutions. They have standards based on credit scores which they use to pick their eligible borrowers and to calculate the terms of loans.
If you have a credit score of 700, then you’re considered a good borrower by lending institutions, and you get about 10% APR. If your credit score drops below 620, then you fall into the bad borrower category, and you pay up to 18% APR.
All that is assuming you even get the loan approved in the first place. If the lender isn’t sure you’re going to repay the loan, then they won’t approve it.
What about Bad Credit Lenders?
There are lenders out there who will give a loan to people with bad credit; they are not major banks. Regional and national banks have very tight standards and will not bother giving loans to you if you have bad credit; not until you clean up your credit score.
One good place to start is with credit unions. They are nonprofits which are run by their members. They are therefore likely to take care of their own. Most have loose membership regulations so joining them should be fairly easy. Their interest rates are also capped at 18%.
You could also consider online lenders, who are more willing to take on risk. They will, however, charge you very high interest rates. This is the same kind of situation you would face at a payday lender, a pawn shop, or any other source of instant finance. They will only lend you money if you agree to pay it back at very high rates.
Personal Loans and how to get them
A personal loan is one of the fastest ways to pay off your credit card debt and get a good credit score. A personal loan is also known as a signature loan and is one of the most used financial products. These loans are typically issued by credit unions and banks. You can, however, get them from friends and family.
Credit unions are fairly similar to commercial banks, as far as their terms are concerned. However, since they’re owned and operated by members, they pass their earnings to their members in the form of lower borrowing costs.
A credit union that is community-based or associated with your employer will usually be willing to look beyond your poor credit and make a subjective judgment about your ability to repay based on your character.
Family and Friends
This one you have to be careful about. Borrowing money from family and friends and not paying the loan back can easily poison your relationship with the family member or friend in ways that are far worse than a bad credit report.
Despite all this, it can sometimes be a good idea to turn to those closest to you as your sources of funds. They will understand you much better than a bank could base on a number, and they will not give you terms as strict as those of a bank or even a credit union.
You should, however, take loans given by family and friends very seriously. They should be treated just as if they were a regular business transaction between you and a stranger. Sometimes, it might even make sense to create a formal contract between you that dictates the terms of the loan and the interest rate.
If it isn’t possible to borrow from a relative or friend, you could approach someone with good credit to cosign your loan with a regular lender. This person should trust your ability to repay and your integrity. The credit score of the co-signer will determine the terms of the loan. All the payment details will go into the credit reports of both you and the co-signer. That means that being late with your payments will damage your co-signer’s credit score. If you make timely payments, however, your credit score will improve and make it much easier for you to obtain loans on your own in the future.
You can also apply for a home equity loan if you have equity in your home. Home equity is the difference between the market price of your home and your outstanding mortgage. Your home will be collateral, and you can obtain a home equity loan regardless of your credit score. The interest rate is typically low and tax deductible.
This type of lending happens from person to person and is a relatively new kind of loan that has been around for nearly a decade and a half now. It usually works on an online platform and allows the borrower to borrow from another individual, rather than an institution. You can post loan listings on various such sites, showing how much you want and what you want it for. Investors will review the listings and decide whether they want to fund it or not.