3 Aug, 2022

To sum up bad credit loans in a few words, it is designed to help you if your credit score isn’t high enough for a traditional financial institution to grant you a loan. 

Bad credit loans are a kind of personal loan for low or no credit score holding individuals. Borrowers use this category of personal loans especially for financial emergencies like car repairs, medical bills,  debt consolidation, and job loss. 

Bad credit loans and personal loans work in the same manner. Individuals take a loan or borrow money from such lenders and pay it back in the form of fixed monthly installments. 

A traditional personal loan can be availed from a credit union, a bank, or online lender. However, credit unions and banks function on rigid credit score standards for borrowers. These financial entities will thoroughly examine your credit history to evaluate whether or not you’re qualified for a loan or the cost of the loan. 

Financial institutions will demand an excellent credit score before approving a loan (a FICO score of 670 or higher). The requirements of borrowers will vary on the basis of your creditworthiness and the lender. 

Bad credit loans are especially for those who have a limited or poor credit history. They are often accompanied with rigorous terms of monthly payment, higher rates of interest, longer waiting period for loan approval, additional fees, and penalties. 

How Can You Avail A Bad Credit Loan?

  • Credit Report Review:

Once you have an idea about your credit score, you can find a suitable lender based on your credit history. 

  • Explore Lender Options:

Compare the terms of loan online and find a personal loan lender suitable for you. Sometimes lenders can prequalify a loan to have an understanding whether or not you’re qualified to pay back a loan while honoring the terms of the loan. Your credit score will remain the same regardless of being pre-approved. 

  • Application Information Is Crucial:

Lenders will ask for a few things when you apply for a loan. This includes your employer name, your annual income, duration for which you’ve worked there, your Social Security number, a summary of your expenditure, your debt-to-income ratio, and your monthly rent. 

  • Apply For The Loan: 

You should apply for the loan when it feels like a suitable fit for you, however, you should apply for one loan application to begin with. Your credit score will be lowered if you apply for several loans in a short span of time. This will also reduce your chances of actually receiving an approval on your loan while increasing the interest rates. 

Bad Credit: What Is It? 

Equifax, TransUnion, and Experian are the major credit bureaus of the United States of America. These agencies offer consumers a detailed document about their credit history or a credit report. The credit report will showcase your payment history on loans or debts that you have incurred over the years. It will also include the debts that you failed to pay. This information will be utilized by the credit bureaus to create a summary of your credit history and allot you with a numeric ranking based on your credit. This numeric ranking is your credit score. 

The leading credit bureaus of the United States assign a FICO score. A credit score that is given by the Fair Isaac Corp. or FICO. It offers a synopsis of the credit report. 

Credit score is created based on the following information –

  • Duration of your credit
  • The money you owe
  • The available credit amount that you’re using
  • The different types of credit (credit cards vs. installment loans) you have
  • Whether the debt is paid on time
  • How much credit is pending 

FICO scores are used by lenders to determine the possibility of repaying auto loans, credit card debts, home mortgage, and so on. This score will have an impact on the amount of money you can borrow, the interest rate of the loan, the repayment period( the duration within which the amount will be paid back), and also the possibility of whether or not you can actually get a loan. A bad credit score will have a direct impact on the terms of the loan or whether you will qualify for the loan. 

Your credit score will have an impact on your loan eligibility. Your option for loans and credit card approvals will reduce in case you have a bad credit and also end up paying higher rates of interest. 

What Is A Bad Credit Score?

Lenders are informed about your creditworthiness through your credit scores. Individuals with 580 credit score or lower are deemed as risky borrowers by the financial institutions. If your credit score is low, the risk will be higher and creditors will less likely approve your loan. 

FICO Credit Score Ranges 

  • Exceptional Credit – 800 or higher
  • Very Good Credit – 740 – 799
  • Good Credit – 670 – 739
  • Fair Credit – 580 – 669
  • Poor Credit – 580 or below

Bad Credit Loans: How Do They Work?

Bad Credit loans are nothing but installment loans that are paid over a specific period of time in terms of regularly scheduled payments. An installment loan is like a fixed-rate mortgage or an auto loan. 

Secured Loans vs. Unsecured Loans

Secured Loans 

Lenders offer collateral like their car, home, or some valuables in order to get a secured loan. In case you fail to pay, the asset that you put up as collateral will be repossessed by the lender. Secured loans are generally large, as the lender has to match the value of the collateral that the borrower offers. A mortgage is a classic example of a secured loan. 

For consumers with a bad credit, secured loans are the desired choice and easier to obtain. Lenders find it less risky. 

When the lender reports the payments made to a credit bureau, an improvement in credit score can be automatically seen by the borrower if he/she makes on-time payments. However, all kinds of secured loans will not boost the credit score of a borrower. 

Unsecured Loans:

There are personal loans that don’t require any form of collateral, they are referred to as unsecured loans. 

The rate of interest is higher on unsecured loans because no collateral is required here. This makes them more expensive. Unsecured personal loans offer less or limited amounts of money to borrowers. In case a borrower fails to pay an unsecured loan, the borrower can be summoned to court by the lender or sell off their debt to a collections agency. 

How long does it take to get an unsecured loan approved?

The duration to get an unsecured loan approved will depend on the lender. There are lenders who will deposit funds into your bank account the next business day. 

How Much Can Be Borrowed With A Bad Credit Loan?

Your credit history, financial situation, and the lender will determine the amount you can borrow. You will be charged with less fees and interest if you don’t borrow more than you require. 

How Much Will My Bad Credit Loans Cost? 

The amount of money you borrow along with repayment terms, and annual percentage rate will determine the total cost of your loan. 

A majority of the loans will have an APR (Annual Percentage Rate) that is the amount you pay for borrowing the money for a year. An APR will depend on the loan amount, fees, monthly interest rate, and duration of time for you to pay back the money borrowed. Bad credit loans generally have a higher APR. If you fail to pay your loan on time, you will have to deal with late fees and costly penalties that will arise due to missing payment deadlines. 

Are Bad Credit Loans Safe?

In case you’ve to apply for a bad credit loan, keep in mind that the lender or loan company is trustworthy. 

You can always educate yourself about a loan company or lenders by following these protocols.  

  1. Check the reviews available on Google 
  2. Go through the lender’s BBB ratings 
  3. Check the payment requirements.

There are lenders who also charge an additional origination fees and other costs. In case you’re considering a lender who charges such fees, make sure they are explained and prominently displayed. You must make inquiries about the things you don’t understand. 

What Kind Of Risks and Scams Should You Look Out For While Opting For A Bad Credit Loan?

Legitimate lenders will never guarantee a bad credit loan before you apply for it. Keep in mind the following warning signs to look out for untrustworthy lenders. 

  • Your credit history isn’t a cause of concern –

The first red flag that you have to watch out for is the lack of concern regarding your credit history. Lenders will take into consideration your credit history and verify the information. This will be done before offering a guarantee for credit. Lenders will closely observe your file and application rather than simply giving away credit to anyone who applies.

In case the lender asks for personal information like your bank account or social security number and don’t mention about obtaining your credit history as a part of the application. You must choose a different lender. 

When your credit history is being examined, all lenders won’t go through an extensive credit check via FICO. Lenders will sometimes run a soft credit check that won’t count your FICO score. 

  • Loan Is Being Offered Via Phone –

It is illegal for any company to conduct their business over the phone where a credit card or loan is being offered or you’re asked to pay for the loan before you have even taken it. This isn’t how things work in the United States of America. You will receive the loan agreement in writing. The terms of the agreement will be disclosed to you. 

  • The Name Of The Lender Is Similar To Another Renowned Organization –

Organizations that aren’t operating legally often name their companies after prominent organizations to give it recognition. In case you’re wondering whether or not a company is legitimate, find out it’s physical address. This shouldn’t be P.O. Box. You must also have a valid phone number that is available on the phone directory. 

  • An Unregistered Lender In Your State:

A loan broker or lender can operate legitimately only when they are registered in the same state where they are conducting business. Contact your State Department of financial regulation or State Attorney General to find out about the registration of the business.

  • A Lender Asks To Pay A Specific Person or Wire Money:

Legitimate lenders won’t ask you to pay any individual directly. Non-reputable lenders will collect the money upfront to cover their charges or fees. If you’re asked to wire money in the form of an advance payment for the loan to begin paperwork, the chances of the lender not being associated to a reputable operation is high. You shouldn’t send money to a company upfront. 

What Kind Of Loans Can I Get With Bad Credit?

Payday Loans 

Payday loans can be defined as short-term loans. They are often referred to as cash advance loans. Borrowers will have to pay a fee in order to borrow the money for a short period of time like a week. 

You can receive a payday loan by writing a check for the loan amount along with an additional lender fee. You’ll receive the loan amount in the form of electronic deposit or cash. The payday lenders will hold onto the postdated check until you receive your next paycheck. This is usually when you’ve to pay back the loan amount and the fees. 

In case the borrower fails to pay back the dues on the given date, the debt will continue to rise until you can pay it off. Annual interest rates on payday loans can go as high as 400% on the original loan amount. 

These loans are very expensive. Payday loans should be a last resort for consumers. 

Credit Union Payday Alternative Loans (PALs) 

If you choose a payday alternative loan, you need to be a part of a credit union. These loans can be availed by the federal credit unions that are an integral part of the National Credit Union Administration. 

PALs are less expensive in comparison to the traditional payday loans. They permit the borrowers to repay the loan over a couple of months rather than on a single pay period. The interest rate cap of PALs are 28%.

Auto Title Loans:

Auto Title Loans span over a short period of time and are basically small loans. In order to receive such a kind of loan, you’ll give the title for your truck, motorcycle, or car as a form of collateral to your lender. You will have to pay a fee.

Auto title loans will demand you to pay it back within 30days. In case you fail to pay it back on time, the lender will repossess your vehicle. Sometimes lenders extend the terms of your loan, this is referred to as rolling over the loan. You will be charged an additional fee to roll over the loan. 

A hefty fee can be charged by auto title loans lenders. This can go up as high as 25%. 

How Can You Build Credit To Avail A Better Loan? 

You can start off by improving your credit score. Lenders will not consider you a risky borrower if you’ve a good credit score. In order to start this process, start by finding out your FICO score. This will also help you tackle a credit – building plan. 

You can improve your credit score by following these terms. 

Avoid Late Payments –

A crucial part of building your credit score is your payment history. Your credit score can be impacted negatively if you pay your bills late, declare bankruptcy, having accounts referred to collections. 

In case you have missed your past payments, you must get current on your account balances. This might take some time, the longer you pay your debts on time, your credit score will keep improving. 

Pay Off Account Balances –

Your credit score will improve if you keep your account balances low. A high outstanding debt will have a negative impact on your credit score. If you owe money to a lot of creditors it will have an impact on your credit score. 

Don’t Max Out On What You Owe

Your credit score is created by comparing your credit limit with the amount of debt. Your credit score will be negatively impacted if your credit limit and the money you owe are almost the same. 

Keep Your Old Accounts Open 

A complicated factor while determining your credit score is the age of your old credit accounts. 

It is better to keep your standing accounts open. According to the Credit Bureau TransUnion, accounts that are open for a long time, and those with a higher credit limit but lower balance will have a positive impact on the credit score. 

Can Your Credit Score Be Improved By Bad Credit Loans?

In case you fail to have an extensive credit history, bad credit loans can help you improve that. You must select an affordable loan and choose a lender that will report your payments to the major credit bureaus. 

If you pay your bad credit loans on time and your lender reports them, it will improve your credit score. In order to prevent negative reporting, make sure you make regular payments on time. 

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