Lenders tend to look at credit scores to determine if borrowers can repay the loan in the long run. If you have bad credit, it might be difficult for you to get a loan. Furthermore, some lenders won’t lend you any money or offer you loans with higher interest rates and fees if you have bad credit.
What is Bad Credit?
It is vital to understand what bad credit really is. Bad credit refers to having a low or poor credit score. This is often caused by maxed-out credit cards, late payments, or short credit history. Moreover, making on-time payments and maintaining your low credit utilization low are ways to improve your credit.
Credit-scoring models, such as FICO and VantageScore, use different formulas to determine your credit score (mostly from a scale of 300-850). The credit-scoring model that will be used for your loan application will vary from one lender to another. Below are the score ranges that you should know about:
| FICO Ranges | |
| Credit Score | Rating |
| 300-579 | Very Poor |
| 580-669 | Fair |
| 670-739 | Good |
| 740-799 | Very Good |
| 800-850 | Exceptional |
| VantageScore Ranges | |
| Credit Score | Rating |
| 300-499 | Very Poor |
| 500-600 | Poor |
| 601-660 | Fair |
| 661-780 | Good |
| 781-850 | Excellent |
Loan Options You Can Consider If You Have Bad Credit
Here are the loan options you should know about if you have a low credit score:
Payday Loans
Lenders that offer payday loans don’t usually check your credit status during the loan application process. Hence, having bad credit is not a big deal and you can get up to $500 or less under this type of loan.
Payday loans are considered as short-term loans. This type of loan is usually due on your next payday and sometimes carries high fees. Furthermore, some US states banned payday loans, while other states chose to set limits regarding its fees and loan amount.
Car Title Loans
Car title loans are also considered short-term loans. This type of loan gives importance to collateral rather than your credit score status. Under this type of loan, the borrower needs to pledge the vehicle’s title as collateral.
Car title loans usually last for 30 days or less. This type of loan usually offers an amount that is 25% to 50% of the value of the car you are borrowing against. Since car title loans use your vehicle’s title to secure the loan, this means that you might lose your vehicle if you fail to repay the loan.
Personal Loans
Banks, credit unions, and online lenders offer personal loans. It can either be secured or unsecured. The main difference between the two is that the former requires collateral, while the latter does not.
Some lenders offer personal loans for borrowers with bad credit that may come with higher interest rates and fees. However, they can be less expensive compared to payday loans and car title loans. Furthermore, you can get more considerable funds and a more extended repayment period when you get a personal loan rather than a payday loan or car title loan.
Peer-to-peer Lending
This type of loan is also known as P2P lending or marketplace lending. This is a system where investors can fund loans to borrowers. Your credit score might not be reviewed thoroughly as compared to other financial institutions that offer to fund. Additionally, P2P lending can issue larger amounts, lower interest rates, and longer repayment terms than payday loans and car title loans.
Payday Alternative Loans
Payday alternative loans are available at some credit unions. This type of loan is also considered short-term, and the payday alternative loans have lower interest rates and fees than the traditional payday loans.
How to Improve Credit
If you think bad credit loans are not right for you, then you should work on improving your credit. Having a good credit score can help you get loans with favorable terms and low-interest rates. It can also help to reduce the overall cost of the loan. This will eventually save you some money in the long run. You can try the following to help boost your credit:
Check Your Credit
It is vital to keep an eye on your credit status. Your credit may have errors that you are not aware of. By checking your credit, you can quickly solve such errors and take advantage of your yearly free credit report so you will be able to check your credit.
Maintain Your Credit Utilization Low
The credit utilization ratio is an essential factor in your credit score. You can calculate this by dividing your total credit balances and credit limits. The more available credit that you spend monthly, the more it lowers your credit score. Moreover, you can improve this by paying down debts and getting a higher credit limit.
Be Wise About Credit Applications
You should know how to manage debts well. Most of the time, applying for new credit needs a credit inquiry that may negatively affect your credit score. However, having different kinds of credit can positively impact your credit score.
Takeaway
Having bad credit does not close your doors to getting a loan. There are still options left for you to consider. However, in deciding whether to get a loan with bad credit, you need to make sure to choose a loan that you can afford. You wouldn’t want to hurt your credit score even more.
My creditors have been good about offering and following though on covid relief plans. With one exception. Wayfair, Comenity Bank, is singlehandedly responsible for a large point drop in my credit score. This despite having paid off another credit card, despite over 4 years of 100% on time payments. How? In the remarks they just added, “affected by natural disaster “. That’s it. That’s all it took to drop my score. I tried all I could to get my credit work fine but all my effort doesn’t yield any result. I called a creditor to informed him about this sudden change and asked him, “How do I get my credit score back” He made me know once your credit score dropped it takes a longer time before you could regain a good credit score/review and later confided to me that I should contact this credit expert “Tom” I contact his email tom.lawrence114 at g mail com. Tom was so honest with me an the outcome was amazing, he makes sure every debt was cleared off, remove dispute items, added tradeline, cleared every negative item and improved my credit score to 800s which I confirmed from the three credit sites
This article outlines some fine options for loans for borrowers with bad credit. But, I don’t think this article properly frames the level of risk and rate of default associated with these types of loans. Loans like payday loans, title loans, and other alternative loans often come with very high interest rates. For that reason, borrowers struggle with repayment and sometimes get caught in what’s called a “debt cycle” – borrowing AGAIN to pay off debt that they’ll eventually have to borrow to pay off again and so on and so forth. Loans like these are to be taken out in the event of an extreme emergency and only if the borrower can guarantee repayment in a timely manner. It’s SO important to understand your terms and options before signing on that dotted line. Overall, decent article.
My friend was able to get a loan no problem. I think the biggest advice is finding a lender that recognizes your credit score or credit situation and provides helpful resources for you to pay off the loan and improve your credit going forward.