A bad credit loan is a personal loan with higher interest rates. Lenders consider those who take out this kind of loan a risky borrower. High-risk borrowers often have to deal with higher interest rates. Still, timely payments made on a personal loan can be just what you need to boost your credit score.
Most personal loans get approved quickly, so it can be tempting to sign the first offer you get. But first, do a thorough check of fees, penalties, collateral requirements, and repayment term length, as well as read the fine print always. It may be wise to meet with a credit counselor who can help you understand whether you can afford to repay the personal loan on time. Consider all your options and think long-term. This personal loan can either clear your name of bad debts or pull you even deeper into the abyss of debts.
When You Need Money Now
People with a fair to bad credit score can run into emergencies. It can be easy to overlook factors like middleman fees, exorbitant interest rates, and closing costs. Direct loan lenders or online lenders consider your need for a shorter processing time and flexibility even with bad credit. While they offer higher interest rates than you’re used to with your bank, choosing one that cuts out the middleman and still offers affordable rates can be helpful. It’s a fix that won’t overburden you in the long run.
What Are Your Options?
Even people with a bad credit score can be discerning before taking out a personal loan. Seek lenders who offer affordable interest rates and flexibility with their qualifying requirements. Here are some of those types of lenders:
- Family Or Friends. These are people who may lend to you without digging through your credit history. And if they have a higher credit score, you may convince them to co-sign a loan to lower your interest rate.
- Peer-To-Peer Loans. An individual or a group of people may be offering personal loans at a higher interest than banks with less strict requirements to qualify.
- Cash Advances. If it’s a small loan you need to use for an emergency, consider this option that’ll sway you from debt. You’ll have to work with a tighter budget immediately after taking out a cash advance to get back on track soon.
- Negotiate With Your Current Creditors. You may work on better terms with people you owe money from such as your landlord or the bank. If you feel like you have no other sources to fulfill your other financial needs, you can ask for a lower or a temporary pause to make payments. You can also try to work on a long-term relationship with your bank for a short-term loan.
- Home Equity Loan. Home Equity Line of Credit (HELOC) is another inexpensive way to borrow money from a reputable source, and credit score won’t be a factor. Plus, the interest you pay can be tax-deductible. Still, remember that you’re using your home as collateral. That should motivate you more to be disciplined in making payments.
- Credit Unions. You’d need to become a member to obtain a small personal loan from them, but they’re generally more flexible than banks.
There are more options for high-risk borrowers or those with bad credit to take out a loan. However, they can also be risky types of loans. These exist but can put you in deeper debt. For instance, you may be thinking about borrowing from your retirement fund or life insurance. But you need to be careful not to overlook the penalties and interest rates—which can be as much as 400 to 700%. These are often overlooked when lenders offer to approve your loan fast.
You Missed Out On These
You can get back to a clean slate with your credit history in seven years—for late payments, collection accounts, and Chapter 13 bankruptcy. At most, it’ll take 10 years for Chapter 7 bankruptcy to stay off your credit report for good.
If you need the motivation to break the cycle of bad debt, consider these side effects of bad credit:
- People with a good credit score (at least 670) can seek more favorable interest rates with more reputable institutions. In contrast, high-risk borrowers have limited or almost nonexistent access to mainstream lenders.
- Your dream apartment may be handled by a rather scrutinizing landlord who’ll prioritize those who are known to pay on time—be that credit or rent.
- Your employer may pass you up on your dream job or promotion after pulling up your consumer credit report. This is especially true for jobs with financial responsibilities.
- Debt has no return on investment (ROI). You pay in interest money that you won’t get back.
To A Fresh Start
The road to a better credit score starts with a commitment to not default on future payments. It’s possible to clear your bad credit history—7 years for many, 10 years at most. A personal loan can be the restart button you need. Remember, even making minimum payments can help improve your credit history and lower your debt-to-credit ratio.