When you find yourself constantly struggling to pay your bills or drowning in credit card debt, a personal loan can help you regain control over your finances. Personal loans can be difficult to find, especially if you have bad credit, but certainly not impossible. By following a few simple steps, you can greatly improve your chance of successfully finding the right personal loan for your situation.
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What is an unsecured personal loan?
An attractive option for those with bad credit, an unsecured personal loan allows you to borrow money without putting up any collateral like a home, or vehicle.
Also known as signature loans, these loans offer several benefits over payday loans and credit card cash advances. You can use these loans for any purpose the borrower decides upon. They are not specific to any particular item like a home or auto loan is.
Another benefit of personal loans is the fact that the terms are clear and simple to understand. These loans are for a set amount of money and have fixed interest rates and terms. Personal loans also usually have much lower interest rates than credit card cash advances. This can make for potentially big savings with regard to the total interest you will be paying in the long run.
How does my credit impact my ability to get a personal loan?
Your credit is based on your past record of borrowing and repaying debt. It’s a measurement of your financial reputation that gives lenders an idea of how likely you are to repay a loan.
The credit scores most lenders use are FICO scores, which range from 300 to 850. Lenders determine eligibility and rates on your credit score and history. However, there isn’t a universal cutoff point that determines with certainty whether or not your loan application will be successful. A score between 620 and 720 is average, and anything above that range can be considered “good”, while anything falling below that mark would be considered “poor”.
If you find yourself with a low credit score, you will most likely struggle to qualify for many conventional personal loans or credit cards. If you are able to find a lender willing to offer a line of credit, it will most likely be at an extremely high interest rate in order to cover the risk involved.
So, how do you find out what your credit score is? The Federal Trade Commission (FTC) established the guidelines for credit reporting and consumer’s access to that information by creating the Fair and Accurate Credit Transactions Act (FACTA). This law, which was created in December of 2003, allows everyone to receive a free copy of their credit score and full report from each of the three major credit bureaus once every 12 months.
I have poor credit. Which loan is right for me?
Consider your options carefully. When looking for a personal loan, take your time and look for the best options available. Interest rates and terms will vary considerably by lender, so it pays to shop around.
Banks and credit unions
Contacting your local bank or credit union is a great place to start. If you already have a checking or savings account open, you may benefit from this pre-established relationship. Also, since most credit unions are non-profit, they are able to keep their operating costs down and often pass savings on to their customers with lower interest rates.
Another option to consider is finding a friend or relative to co-sign with you on a loan. Many times financial institutions are hesitant to lend money to people with questionable credit histories or lower scores, but when applying for a loan with an additional co-signer, they may reconsider. If your credit is really bad, friends and relatives may be your only chance of finding a loan with reasonable terms.
If you are fortunate enough to have people like this who willing and able to help you in this way, make sure you treat it like a business transaction. Remember that if you default on the loan, your co-signer will be legally responsible for paying the full amount borrowed. The loan will also appear on both of your credit reports, so your payment behaviors will not only reflect on your credit but theirs as well.
Marketplace loans, also known as peer-to-peer (P2P) lending is becoming a popular alternative to conventional lenders such as banks and credit unions. This is largely due to the fact that they are able to offer lower interest rates to borrowers and higher interest returns to investors. While many P2P lending platforms require a credit score of 640 or higher, you can always post an explanation of your current financial situation. Some individual investors may be empathetic and willing to take certain factors into consideration which would not otherwise be reflected in your credit score.
Payday loans are an option, but they charge high interest rates. While payday loans are quite popular because of their lenient credit requirements, they come with steep charges. Only consider them as a last resort.
These types of loans usually offer smaller amounts of credit at interest rates of around 400% APR. The loan repayment and fees are due in full at the borrower’s next payday, usually within 14 days. Borrowers who can’t pay their loans have the option of renewing them, which involves additional fees and more charges. This often increases the APR for typical payday loans to rates which can easily reach over 1000% and can easily suck you into a cycle of rolling over the loan, only paying the additional fees required, and never paying off the initial amount borrowed.
Another option to consider is a commercial lender who will loan you a more considerable amount of money and allow you much longer to repay the loan, therefore actually giving you a chance to really get out from underneath whatever debt burden you are experiencing. These companies are socially responsible and do not force sky-rocketing interest rates on people with the misfortune of a low credit score.
How do I figure the total cost of a personal loan for bad credit?
When shopping for a loan, make sure you understand the terms and conditions. Calculate the total cost of a loan.
While many people estimate the total cost by looking at the APR, or annual percentage rate, they may also need to take into consideration other fees and charges in order to figure the true cost of the loan. Some lenders may charge a one-time “set-up” fee, while others may tack on a monthly charge for sending out statements. Whatever the charges might be, they should include them in the grand total.
Some lenders charge additional fees, such as origination fees, which are not part of the loan’s APR. To avoid surprises, the Consumer Financial Protection Bureau recommends you request a Good Faith Estimate (GFE) from lenders.
A Good Faith Estimate spells out the interest rate and fees of the loan, which makes it easier to compare loans. Once you receive a GFE, the lender is regulated on what changes can be made to the offer, and any changes must be disclosed within three business days.
How do I choose the best lender for my needs?
It is important to do your homework and spend some time looking into each company before you sign on the dotted line. There are several things that are key to making sure the company you choose is right for you.
Research the lender
Once you have found several loans that look right, do a little research into each of the organizations offering the loans. See what accredations they have and if they have any complaints with any government agencies that have been set up to protect customer interests.
Look for trusted online reviews
There are many sites that will compare different lending options and break down each of the benefits and downsides in a simple and easy to understand manner.
In the end, it is important to keep in mind the goal of repairing bad credit so that you won’t find yourself in a financial hardship in the future. While you may be experiencing some monetary woes now, it’s good to know there are options to help you out of the situation.
Although getting a loan with bad credit is possible, it doesn’t mean that it is the right choice. If possible, avoid getting a personal loan when your credit is bad, and instead try investing your time and energy into improving your credit score and paying off your current debts.
Unfortunately, there are no quick fixes. But be patient. Bad credit doesn’t have to be forever. With as little as six months to a year of responsible spending and paying all your bills on time, you will be able to see big results in the overall repair of your credit.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.