Low credit scores can limit your borrowing options. Bad credit loans are personal loans to bail you out of a financial emergency.
Your credit score is the defining factor that can help you secure a loan. Most conventional lending institutions frown at a credit score which is lower than 650.
This is where bad credit loans could come as a savior. However, these loans are often considered expensive due to high APR (annual percent rate), strict repayment terms, and other policies. But having no loan can cause more serious issues when an individual is facing a financial crisis.
Let us walk you through the various loan options available to you when you have a poor credit score. The lenders factor in other variables such as your assets when deciding to grant a loan with bad credit.
1. Online Lenders
Online lenders (or online banks) offer competitive loan products to borrowers. Unlike traditional lenders, they do not judge your loan repayment capability solely on the basis of your credit score. They look at other factors such as your employment history, education level, and loan’s purpose.
Online lenders are a salient option for securing bad credit personal loans when you have a poor credit history or no credit history. Their loan application process is easy to understand and readily accessible online. Their standards of borrowing are more favorable rather than restrictive.
However, it is important that you search through various online lenders to find one that meets all your needs. You need to find a reputable online lender with a successful history, even if they have not been in business for long.
You need to remember that most of these online banks are anyway fairly new and might not have a long history.
2. Home Equity Loans
Another way to offset the unfavorable conditions associated with a poor credit history is to offer something as collateral. You can use your fixed assets such as home equity to mitigate lender risks and create a stronger loan application.
Using your home as a caveat for a bad credit loan is not free of risks. You need to be careful while preparing for the loan repayment in order to prevent a default.
You might end up losing your home or taking up a secondary bad credit loan. However, if you believe that your reasoning behind signing up a loan is viable then this might be one of the better bad credit loan options available.
In addition, using your home as collateral puts a lender’s mind at ease which helps your case. You can offer your home as collateral to counterbalance your poor credit history while drafting the loan agreement.
3. Other Assets
Home equity is just one of the assets you can use as collateral. There are other fixed assets such as car, stocks, boats, and savings that can be used as leverage against your poor credit history.
These types of loans are deemed secured loans as the amount is secured against something you own. In the event of a default the lender has the right to take over your asset to recover the loan amount and damages.
These loans are a surefire way of getting instant finance even with a poor credit history. Secured loans compel lenders to look beyond the credit score and offer the loan amount. The risks associated with these loans are huge at the borrower’s end which satisfied many lenders.
Home equity will yield the maximum benefit. You need to factor in the risk-reward relationship. Yields from less significant possessions might be low at face value. However, the risks associated with these assets will also be low in the event of a default.
4. Co-signed Loans
Co-signed loans refer to loans taken out with another person. These are an ideal way of getting bad credit loans with low interest rates. However, you need to make sure that the person you choose as your co-signor has a good credit history.
Lenders tend to look at loan applications favorably if a loan purpose is strong and a co-signor is willing to share in the risks.
The presence of a co-signor provides the lender with added assurance in regards to the loan being paid back on time. Convincing a lender of your capabilities to pay back a loan is critical to having the loan application approved.
5. Friends and Family
If you cannot find a co-signor and have no personal assets to use as collateral, then you might want to turn towards your friends and family. It can be difficult to involve your personal relations in a financial matter. However, you can be sure of low interest rates and freedom from repossession risks in this option.
You can avoid complications by seeking loan in a formal way from your friends or family members. It is best to make a loan agreement spelling out the loan terms to prevent confusion. This will help you deal with unsavory situations if they arise.
6. Peer-to-Peer Lending for Bad Credit
P2P lending is one of the newest ways of taking up a bad credit loan. This is similar to online lending except that here you deal with individuals rather than institutions. The same risk-to-reward approach should be employed here to seek the right lending option.
There is a greater risk to both borrowers and lenders in this option. However, you can make the most of this option by searching for the right lender. There are several peer-to-peer lending platforms available online where you can find a reliable lender.
7. Bad FICO Credit Unions
If you are not already part of a credit union then you should look into joining one. This might be an unconventional approach to acquiring a bad credit loan. However, there are various credit unions that offer such loans with a personal touch.
They do not judge your loan application merely against the backdrop of your credit score. A credit union will allow you to become a member only after careful judgment based on your demeanor and character. There are various other advantages of credit unions that make them a worthwhile effort.
The best way to apply for a bad credit loan is to prepare ahead and prove that you are not a lending risk. It is important not to rush into an option and to choose wisely.