When you apply for a loan, lenders will look at your employment history, social security number, your proof of income, and your bank account details. Aside from these, they will also check your credit history. If you have credit issues, they might not approve your loan. It may not also be easy finding the right loan for you. However, there are lenders that can offer loans for people with bad credit. This article will explain how much money you can get with bad credit and how to go about getting that loan.
What is a Bad Credit Loan?
Bad credit loans can be granted to people with bad credit scores, or a credit score below 622 (on Equifax). But contrary to its name, these loans are not just for people with bad credit. They’re also useful for people with no credit history. Most banks will demand a credit score of 700 or better to accept a credit card or personal loan. A bank may deem you “high risk” if your rating is less than 622.
If your credit score isn’t high enough for a bank to accept your loan, you might acquire a loan for bad credit from a financial organisation. Because of the risk associated with lending money to people who don’t have a perfect track record of repaying the money, the interest rate on bad credit loans is higher. However, the process is far simpler – and faster – than going via a bank. You would most likely receive the money in your bank far faster with a negative credit loan than you would with a bank loan.
Types of bad credit loans and their uses
- Secured Loans
Secured personal loans are loans that are backed by collateral or secured against an eligible asset you own, such as your house or car. This means that even if you have bad credit, you can still get a loan. However, if you can’t pay your monthly fee, your collateral can be used by your lender as payment. If you apply for a secured loan, the application process could take longer. You would need to provide specific details such as the value of your asset. Most personal lenders would also require the value of the asset to be at least equal to the loan amount.
- Guarantor Loans
Another option for bad credit borrowers is to get a guarantor loan. For this type of loan, you will need someone, usually a family member or a friend, to guarantee on your behalf that you will repay the loan. If you default on the loan, your guarantor is legally bound to pay for the remainder of the loan amount plus the interest. Guarantor loans also have high-interest rates due to the added risk. However, it can also be advantageous. A guarantor loan can improve your credit score as long as you make repayments on time.
- Bad Credit Personal Loans
Bad credit personal loans are just like unsecured loans. If you can’t offer any collateral or a guarantor, a bad credit personal loan might be your only option. However, they have much higher interest rates and perhaps other fees. This type of loan also limits the amount you can borrow and lenders may restrict the loan term. Defaulting on a payment will also affect your credit score and some lenders may take legal action to get their money back.
- Home Equity Loan
A home equity loan is a loan that allows you to access and use your home equity as collateral for the loan. Your loan will be disbursed in one lump sum and must be paid back in monthly payments.
- Instalment Loan
Instalment loans are a type of loan that lets you borrow a specific amount of money and pay it back over time. Unlike a credit card, where you have access to a revolving credit line and interest is charged based on the amount you use, an instalment loan gives you a lump sum of money upfront. You will also pay a fixed amount for a specified number of months.
- Home Equity Line of Credit (HELOC)
A HELOC is only an option if your mortgage debt on your primary property is much less than the value of your home. A HELOC, as the name indicates, is a revolving line of credit similar to a credit card. You will be limited by the amount of equity in your property, and you will only be charged interest on purchases made on the line.
- Payday Loans
A payday loan, or a short-term loan, is a loan with short repayment terms – generally by your next paycheck. These loans usually feature hefty interest rates and must be returned in one big sum. A payday loan is expensive and isn’t always the best option even if you don’t have good credit.
Steps to getting a personal loan with bad credit
- Check your credit score and credit reports. Before you apply for a loan, make sure to check your credit report to know which loans you can qualify for.
- Ensure that you can repay the loan amount. If you have bad credit, the last thing you want to do is take out a loan you can’t repay. This will only make your credit score worse. As you shop for loans, ensure you know the monthly payments and when they will be due.
- Compare bad credit loan options. While a bad credit score will not qualify you for the best rates and terms, don’t assume that only the worst rates and terms will be available. There are many options available and you may check with your bank or credit union.
- Get prequalified. Prequalification, which is sometimes used interchangeably with pre-approval, determines if you are likely to qualify for a loan. You may use a soft credit enquiry to provide the lender with your information and find out whether you are preapproved.
- Gather financial documents. When you apply for a loan, the lender will ask for several financial papers to process your application. Gather these papers and pieces of information before beginning your loan application, since you may need some or all of them to complete your application.
- Be prepared for a hard credit check. When you are ready to apply for a personal loan, be informed that the lender will most likely do a hard credit check, also known as a hard pull. A hard pull will harm your credit score in the short run. Too many hard credit checks in a short period of time might give the impression that you are seeking loans that you cannot afford.
Additionally, be cautious about how many loans you apply for, and be prepared to see your credit score temporarily decline as a result of a loan application. If you make on-time loan payments, you should be able to raise your credit score in a few months.
The bottom line is, that even if you have bad credit, it’s still possible for you to get a personal loan. You must, however, shop around to find the greatest deals. Some lenders appeal to subprime consumers, although their loan products are sometimes substantially more expensive. Secured loans are another alternative, but you risk losing your asset if you run into financial difficulties.
There are a lot of finance options for you that are worth considering. Some lenders and banks can offer flexible criteria and can cater to borrowers with not-so-good credit scores. Consider getting prequalified to determine which lenders could be a suitable fit for you.
Marjorie HajimMarjorie Hajim is the SEO Manager for Friendly Finance. Friendly Finance is a leading loan matching service in Australia specialising in consumer finance. She loves growing businesses with a focus on their online presence and is passionate about organic growth and all things digital. She has written articles for Coinpedia, MoneyVests, HomeBusinessMag, & many more!