5 Ways to Get a Loan with Bad Credit
August 7, 2019
“I have bad credit, so can I still get a loan?” This is a simple question that, unfortunately, does not have a simple answer. While you may, technically, be able to get a bad credit loan, the real question you should be asking yourself is at what cost.
Loan approval when you have a bad credit score is bittersweet. On one hand, it’s a relief to get approved. On the other hand, the interest rate and loan terms may prove difficult to deal with. We outline five helpful ways to getting a loan with bad credit, the cost of bad credit, and how to overcome bad credit to improve your finances.
- Get an installment loan
- Apply for a secured loan
- Join a credit union
- Get a co-signer
- Avoid payday loans
1. Installment Loans
There are specific installment loans for people with bad credit or bad credit history. An installment loan is one that you repay on a consistent schedule and in a fixed amount. If you have bad credit, you may end up with higher interest rates and fees.
With this type of loan, you’ll typically have higher interest rates, but they’re only as high as around 30% compared to the 400% of payday loans. This combined with the longer repayment time makes them a better option to the payday loan. You can also borrow a larger amount of money.
Personal installment loans:
- Specific options if you have bad credit
- Set repayment timeline
- Better APR than payday loans
2. Secured Loans
Secured loans are granted to borrowers who own a valuable asset — generally referred to as collateral. Most secured loans use vehicles as collateral but other eligible assets include a house, boat or savings account. These loans require low to no credit requirements.
With a secured loan, if you’re unable to pay back the amount you borrowed, the lender is legally permitted to seize your asset.
Secured bad credit loans typically have high fees and terms, but can offer larger cash amounts than unsecured loans. When deciding on a secured loan, keep in mind that the lender can assume possession of your asset if the loan is not repaid.
Keep in mind this is higher risk as a borrower, given there’s potential for lost assets.
- Collateral comes with risk
- Low to no credit requirements
- Larger loan amounts and lower interest rates
Call For A Free Credit Consultation
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3. Join a Credit Union
Compared to banks or other institutions, credit unions accept borrowers with bad credit, regardless of your score. Being a credit union member is helpful when you apply for a loan since it doesn’t focus as much on your credit score and the union may be more willing to work with you.
Many credit unions offer “second-chance” checking accounts for those with poor credit history. After a while of positive behavior, you have the opportunity to convert it into a regular checking account. Credit unions also typically have lower interest rate ceilings, compared to banks.
4. Get a Cosigner
A co-signer is a great option if you have bad credit. Find a reliable and trustworthy friend or family member who has high or great credit to cosign on the loan.
Keep in mind whoever you cosign with will also be liable for payments and if funds aren’t paid, their credit will also take a hit. You will have more loan options and better rates and fees associated with a cosigner.
5. Avoid Payday Loans
A very common solution for many people with bad credit is to get a payday loan. Payday loan lenders offer cash immediately to those with a poor credit score since it’s fairly easy to qualify.
Many payday loan centers don’t even check your credit report. All you have to do is show that you have an income, a verified bank account, and that you’re capable of paying back the funds.
The downside is that payday loan interest rates are incredibly high. These centers don’t mind you borrowing money, as long as you pay it back and pay it back fast. However, the odds of that happening if you’re already in debt is hard, which leads to even more debt.
If you’re in an emergency and you need cash fast, going to a payday loan center might be your only option. However, this should be a last resort. Because interest rates are high; you don’t want to risk getting yourself into a vicious cycle.
Avoid payday loans or auto title loans that have:
- Short terms
- High-interest rates
- High fees
Cost of a Loan With Bad Credit
Lenders see a low credit score as an indication that you’re a high credit risk and therefore more likely to default on a loan. As a result, lenders charge high-interest rates to offset risk and protect their investment.
You can end up paying a lot of money in interest. For example, someone with excellent credit could be approved for a 30-year mortgage of $250,000 at 3.9% interest. The same loan would require 6.3% interest for someone with poor credit, leading to $132,574 in additional cost over the life of the loan. In the chart below you can see how the cost of bad credit adds up over time:
|Credit Status||Rate||Payment||How Much Your Bad Credit Costs You|
The extra interest payments are essentially an insurance policy for lenders. Interest provides lenders with extra money to cover the losses associated with defaulted loans. Much like an insurance policy, higher-risk individuals are charged more than lower-risk individuals.
Bad credit loans cost borrowers thousands, tens of thousands, or even hundreds of thousands of dollars in extra costs. But, the question remains: how can you secure a loan without paying a small fortune in interest and other fees?
How to Avoid Bad Credit Loans in the Future
Many people feel like they’re stuck with bad credit scores. Why else would they be willing to sacrifice so much? But, in reality, you have far more control over your financial future than you think.
Always Dispute Credit Report Errors
It’s only right for consumers to want a fair and accurate credit report, but credit reporting errors, omissions, and questionable information can all unfairly mark a credit report.
Fortunately, the law affords all Americans the right to dispute any items in their credit report that they feel may be inaccurate, untimely, misleading, incomplete, ambiguous, unverifiable, biased or unclear ("questionable").
Because negative credit entries have such a large impact on credit scores, by removing these listings, people have been able to leap from poor credit to credit scores of 700 and above.
Take the Steps to Fix and Improve Your Credit
While a bad credit loan might seem like one of your only options for getting the cash you need, know that bad credit doesn’t have to be permanent. You can take steps to fix your credit and improve your score over time.
By taking positive actions such as removing errors on your report and paying on past due accounts, your credit score will begin to recover. Even with small improvements, you’ll be better qualified for loans — meaning your payments will be less and your terms will be better. By taking the right steps to repair your credit, you’ll be closer to financial stability and prosperity.
Lexington Law Firm’s credit solutions are designed to help people identify and challenge inaccurate credit items. Contact Lexington Law Firm today for a free and personalized credit repair consultation.