Although there are many different loans for bad credit, the most popular type is an unsecured personal loan. This type of bad credit loan is a good option for individuals with low credit scores of 669 or less who need quick funding of up to $50,000 that can be repaid within two to seven years.
When considering a loan for bad credit, some of the most important factors are the amount you can borrow, how quickly the funds will be repaid, how much you’ll pay in interest, and how soon you can get funding. Not only do the best providers of bad credit loans offer transparent pricing and terms, but they can also get you funded in as soon as one to two business days.
What is a credit score?
A credit score is a three-digit number issued by authorised credit bureaus to ascertain the loan worthiness of borrowers. The credit score is based on several factors like how timely you have been with loan repayments, the overall debts you have, the type of debts, etc. A higher credit score implies that the person has a sound repayment capacity and is not a risk for defaulting on loans or other payments.
If a person has defaulted in the past, on payments of credit card or prior loans, then the credit score of such person will be lower. A person with a lower credit score is considered to be a high-risk candidate for loans. If a lender sanctions any loan to a person with a low credit score, it will usually be at a higher rate of interest.
The reason credit report and credit score are given so much importance are because it determines most of the attributes of a loan – Interest rate, tenure, loan amount etc. Banks generally prefer people with a credit score of 750 as an ideal borrower. Anything below that your rate of interest(increases), loan amount(decreases) and tenure(decreases) will get affected.
When Should You Avail a Bad Credit Loan?
Bad credit loans should be availed only when necessary, which can be when you are in any one of the below-given situations:
- Your loan application has been rejected by many lenders due to your low credit rating.
- You have defaulted on your credit card payments.
- You have no other way to manage your current debts.
- Your financial situation has improved and you can afford to repay a loan to repair your credit score.
Things to Keep in Mind Before You Avail a Bad Credit Loan
Before you decide to avail a bad credit loan, ensure that you bear the below-given points in mind:
- Do a proper research and explore the benefits offered by various lenders. Choose a lender that offers lower interest rates.
- Before you apply for a bad credit loan, check your eligibility to ensure that your loan application does not get rejected as that may damage your credit score further.
- Go through the terms and conditions offered on bad credit loans thoroughly so that there are no surprises later.
- Evaluate your repayment capacity before you decide to apply for a bad credit loan.
How to Get a Loan With Bad Credit
Getting a personal loan with a bad credit score is not impossible, but it may require some extra legwork from you. While the process may vary depending on your specific score and lender, here are the general steps you can follow:
- Check your credit score. Before you start looking for the best lender, it’s crucial to check your credit score online through a credit-providing website or your credit card provider. This will give you an idea of what you can and can’t qualify for. You should also check for any inaccuracies tied to your credit score, like a debt that does not belong to you.
- Improve your score, if necessary. If you find out your score is too low, take time to improve it before submitting an application. Some quick ways to improve your credit include repaying any outstanding debts and reducing your credit usage.
- Evaluate your budget. Prior to looking for the right lender, evaluate your budget and understand how much loan you can afford. If you take too big of a loan out, you may find yourself struggling to meet future repayment obligations and damaging your credit even more.
- Prequalify with multiple lenders. Some lenders offer a prequalificaiton process, which lets you check whether or not you would qualify without a hard credit check and see what terms you’d receive once approved
- Add a co-signer, if necessary. If you need to boost your application to receive better terms, consider adding a co-signer. A co-signer is a secondary person who agrees to pay back the loan if you fail to do so, which reduces the risk you pose to the lender.
- Submit your application. Once you’ve found the best lender for your situation, submit an application online or in person. Prepare to provide your personal information, such as your Social Security number (SSN), address and income information.
- Repay your loan. Once your lender approves your loan and disburses the funds, it’s time to start repaying your loan. Setting up autopay is a surefire way to never miss a payment.
Loans for Bad Credit Options
When it comes to personal loans, there are two types you can apply for: secured and unsecured loans. However, if you’re having trouble qualifying for a personal loan, consider other loans for bad credit.
Secured & Unsecured Bad Credit Personal Loans
Traditional personal loans can either be secured or unsecured. Secured loans require you to provide something of value (also known as collateral), such as your car, savings account or home, to back (or secure) the loan. The lender can repossess the collateral if you fall behind on payments or default. This makes them less risky to a lender, which also means they tend to come with more favorable terms, like lower interest rates, and fewer qualification requirements.
Unsecured loans, on the other hand, are the more common of the two and don’t require any collateral. Because these loans don’t require collateral and therefore pose more risk to lenders, they typically come with more qualification requirements and higher interest rates. The loans on this list are all unsecured personal loans.
Student Loans for Bad Credit
If you’re trying to cover higher education expenses, a student loan for bad credit is likely the direction you want to look. Although private student loans typically require good credit, borrowers with bad credit can take out federal student loans, which don’t require a credit check. Federal loans also come with the most flexible repayment terms, including forgiveness if you work in public service or choose certain repayment plans.
Auto Loans for Bad Credit
An auto loan is a secured loan that uses your car as collateral, which means the lender can repossess your car if you fall behind on payments or default.
Similar to personal loans, auto loan qualification requirements vary for each lender and dealership. While we recommend a minimum credit score of 670 to receive the most favorable terms, you can still qualify for an auto loan with a lower score as long as you meet the debt-to-income (DTI) requirements and bring a larger down payment.
Payday Loans for Bad Credit
Payday loans are short-term, small-dollar loans (usually up to $500) that you repay once you receive your next paycheck, typically two to four weeks after you take out the loan. Many lenders don’t require a credit check, which is often enticing for people with bad credit. However, don’t get your hopes up. Payday loans come with a ton of their own risks and sky-high fees. Consider other alternatives first, like personal loans or borrowing money from friends and family.
Home Equity Loans & HELOCs for Bad Credit
If you have enough equity in your home—your home’s current market value minus your remaining mortgage balance—you may be able to get a home equity loan or home equity line of credit (HELOC). Both let you draw against your home, which means your home secures the transaction and the lender can repossess it if you fail to repay. However, home equity loans are disbursed as lump-sum amounts while HELOCs limit you to withdraw funds on an as-needed basis.
But it’s unlikely borrowers with bad credit scores can qualify for these loans. Most traditional lenders require minimum scores between 600 and 620. There might be a specialty lender or credit union that will make an exception, but it’s not common. People with scores less than 600 would have to go through hard money lenders, such as private investors or companies, not a bank. While hard money lenders are more flexible, they’re typically a more expensive route.
How a Diligent Borrower Should Deal With a Bad Credit Report ?
Consider the case of a diligent borrower who had taken a home loan from a premier private bank. The gentleman prepaid his loan a few years before its 15-year tenure. Given his excellent track record, the bank voluntarily gave him a waiver on the last EMI.
Some years later, he approached another private bank for a personal loan. Later, his application was turned down without assigning any reason. The man then approached the largest public sector (PSU) bank. Now he was told his loan approval had been held back provisionally.
On enquiring, he was informed that one EMI of his previous home loan was unpaid. Shocked, the man insisted he had repaid the loan in full and there was nothing pending. When he probed further to know the precise amount pending, the bank found this was nil.
The gentlemen then realized that the EMI waiver had not been properly reported by his previous bank and the system labelled him a defaulter as one months’ payment was shown outstanding. The PSU bank manager expressed inability to help and said it was best he approached the concerned credit bureau to rectify the anomaly.
Unfortunately, the credit bureau was only willing to update his record if he paid the fees for their report. Peeved, the man refused to pay for updating an erroneous record, which was not his fault. Fortunately, the issue was resolved when the PSU bank cleared his loan after he provided the NOC of the private home loan lender, indicating his dues were fully paid.
This example is to indicate periodic checks of your credit report could address anomalies, if they occur. If you fail to correct discrepancies and update your credit report in time, it could be troublesome when an urgent loan is required.
- What are the documents I will have to submit in order to apply for a bad credit loan?
- PAN Card
- Passport/Aadhaar Card
- Salary account statement for the last two months
- Salary slips for the last two months
- Passport size photographs
- Copy of rental agreement if you reside in a rented house
How can I increase my credit score?
Even if you have bad credit, you can still work to increase your credit score and easyfinancial can help you on your journey!
There are 5 main steps to help you build or increase your credit score:
1. Pay more than the minimum. If you have a monthly minimum of $20 on your credit card, always try to pay a little bit more than the minimum required if you can’t pay off the whole balance.
2. Always pay on time. Late payments will get reported to the credit bureaus while a good payment history will show that you are financially responsible which can help you increase your credit score.
3. Build a credit history. The longer your credit history, the better it is to help you have a higher score. If you want to reduce the number of credit cards you have, don’t throw out the oldest one.
4. Keep your balances low. If you are using all the credit you have available to you, that could show you as a higher risk.
5. Keep only as much credit you need and try to have a mix of credit types.
Checking Your Credit Report for Discrepancies
Sometimes, errors can creep into your credit report inadvertently, impacting the chances of procuring a loan. Therefore, you must check your free credit report online at least once a year to determine if there are errors and rectify them, if found.