Types of Bad Credit Loans

Finding an affordable bad credit loan can be a challenge, but there are plenty of options. Diligence will be rewarded. The loan could come from your regular bank, but more affordable interest rates and flexible qualifying requirements probably can be found at these options:

  • Credit unions
  • Family or friends
  • Find a co-signer
  • Borrow from the equity in your home
  • Peer-to-Peer Loans
  • Online Loans
  • Secured vs unsecured loans
  • Negotiate an agreement with your bank
  • Cash advances
  • Payday loans

Other options like borrowing from a retirement fund (must be paid back or face a penalty); borrowing against life insurance (more penalties); and payday loans (exorbitant interest charges) exist but are risky. A better alternative would be to consolidate debt.

Credit Unions

The most alluring aspect of a credit union loan is the ceiling rate of 18%, which applies to anyone, regardless of credit score. Additionally, a credit union may be willing to look beyond a poor credit history and make a judgment based on your character and your promise to repay. A veteran of the armed forces should consider the Navy Federal Credit Union or PenFed Credit Union. A teacher or government worker might check into the State Employees Credit Union or Schoolsfirst Credit Union.

Friends and Family

This is a great place to find low interest, easy repayment terms, but also is dangerous from a relationship standpoint. On the other hand, family and friends aren’t likely to put you through a grueling qualifying process and may cut you some slack on the interest rate, if they charge one at all. Treat any loan from someone you know as an important business transaction between you and a stranger. Create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.

Get a Co-Signer

Know someone with good credit? Someone you trust who also trusts you? Respectfully ask her/him about cosigning for a bad credit loan. Because the co-signer is equally responsible for repayment, the lender sets the loan terms based on the borrower with better credit. Stick to the agreement: All payment information will be recorded on both your credit report and your cosigner’s, so if you default on the loan, or you’re late with payments, you both suffer. Make timely payments and your credit score will rise, improving your prospects for getting future loans, with better terms, on your own.

Home Equity Loan

Homeowners who owe less than their dwelling is worth can apply for a home equity loan or home equity line of credit (HELOC). With your home as collateral, home equity loans can be obtained regardless of your credit score. The interest rate is usually low, because the loan is secured by the home. Remember, tapping your equity puts your property in jeopardy. But if you are disciplined and have a reliable income, it is an inexpensive way to borrow from a reputable lender.

Peer-to-Peer Lending

Peer-to-peer lending has been around since 2005. P2P lending is an online platform that allows you to get a bad credit loan directly from another individual or group of individuals rather than from an institution. Potential borrowers post a loan listing on various peer-to-peer websites, indicating the amount needed and what it’s for. Investors review the loan listings and choose borrowers they wish to fund.

Online Personal Loans

Online lenders are essentially banks that don’t have offices. They do their work online and offer bad credit loans for things like debt consolidation loans and home repairs. Online lenders tend to be speedy, making decisions in minutes and depositing funds in the borrower’s account in a few hours or days. Many have no application fee or prepayment penalty.

Secured vs. Unsecured Bad Credit Loans

With a secured loan, you borrow against an asset you own, such as a home, car, boat, property, savings or even stocks. Because something tangible backs a secured loan, terms and interest rates are more favorable than with an unsecured loan, which hinges on your promise to repay.

Negotiate an Agreement with Your Bank

Longtime customers with solid records who only recently suffered financial setbacks may be able to negotiate an agreement with their banks for a short-term, bad credit loan. The loan limit probably won’t be very high and it would really be a good-faith gesture on the part of your bank. Bottom line: It can’t hurt to ask.

Get a Cash Advance

A cash advance is a loan using your credit card line. This is a really high-risk solution for a financial problem. A cash advance carries heavy interest charges, higher than those on credit card purchases, and you’ll probably incur a fee (3%-5%), all of which violate the First Rule of Holes. Still, in genuine emergencies, a cash advance is among the fastest ways to get money.

Payday Loans

Payday Loans are last on this list because that’s where they belong. Also known as “predatory loans,” payday lenders typically charge a 399% interest rate with a two-week payback period. That’s $15 for every $100 you borrow. And you’re expected to have the $115 or $230 or $345 or $460 ready to repay by the time your next paycheck arrives. Good luck with that.

Pros and Cons of Bad Credit Loans

It makes sense to use caution when taking on any loan, but if you have bad credit, don’t make it worse by being irresponsible. Predatory lenders are all too happy to take your money and make your life miserable if you get sloppy.

It’s time to look elsewhere if the lender:

  • Doesn’t require a credit check.
  • Doesn’t check your income.
  • Guarantees you’ll be approved.
  • Can’t be found for customer reviews or a Better Business Bureau ranking.

Those are red-flag warnings that you might have encountered a loan scam. Closely examine the pros and cons of the situation before making a final decision.

Advantages of Loans for Bad Credit

  • Loans for Bad Credit Are Fast: Most bad credit loan applications are available online, requiring only a few hours to get a response. At some places, you’ll have the money in your account within a day.
  • Lower Interest Rate than Credit Cards: Generally, bad credit loans pack a lower interest rate than you pay on credit card debt.
  • Many Lender Options: The number of peer-to-peer lending businesses seems to double every year. If you’re patient enough to make lenders compete for your business, you’re more likely to score a lower interest rate.
  • Repayment Term Length: Repayment terms could stretch anywhere from 1-5 years.
  • Improve Your Credit Score: By delivering timely payments, your credit score will rise, making you a more desirable candidate next time you need a loan.

Disadvantages of Loans for Bad Credit

  • High Interest Rates: You’re a risk, so the lender wants a reward — sometimes a huge reward.
  • Fees and Penalties: Read the fine print. Is there a loan origination fee? What is the late fee? Prepayment penalty? Check carefully; some lenders charge a fee for accepting payments by check.
  • Collateral Sometimes Required: You may have to put a house or car at risk to get the loan. If you miss payments, you could lose whatever is backing the loan.
  • Might Not Be Licensed: Not every online lender is licensed in every state. Be sure the company you choose is certified in your state before paying for their service.
  • Can Increase Debt: It’s vital to budget and ensure you can afford what you borrow. Predatory lenders are delighted to take your money. If you’re unsure, call a nonprofit credit counseling agency and discuss options.
  • Assess Multiple Offers before Making a Final Decision: Competition provides the chance to compare and research the company you eventually choose.

Check Also

Private Student Loan Rates: January 23, 2024—Loan Rates Jump Up

The average interest rate on 10-year fixed-rate private student loans rose last week. For borrowers …

Leave a Reply

Your email address will not be published. Required fields are marked *