A loan granted to an individual with a low credit score or no credit history is called a bad credit loan. Usually, lenders are hesitant in giving loans to people with poor credit, as the risk of payment defaults is higher among them. Banks and lending agencies consider a low credit score to be equivalent to the low repayment ability of the individual, so it gets difficult for people with poor credit to get a loan.
When is it called a bad credit score?
An individual’s likelihood of repaying a loan is measured by their credit score. In general, credit scores fall in the range of 300-850, and the repayment capability of an individual increases with an increase in their credit score.
Usually, bad credit scores fall between 300 and 670. Anyone who has a credit score in this range is considered as a high-risk applicant, and banks usually charge them high interest rates even if their application is approved. So, these individuals are primarily the ones who opt for bad credit loans.
The definition of good or bad credit varies from one lender to another. Although many lenders do not grant loans to individuals with a credit score below 650, some others do. This makes it difficult to ascertain what falls under the good or bad credit score range. That being said, here’s a universally accepted range of measuring one’s financial standing based on their credit scores (FICO):
- 300-499: Very poor
- 500-600: Poor
- 601-660: Fair
- 661-780: Good
- 781-850: Excellent
What are the possible reasons for a bad credit score?
Several reasons or simple spending habits could lead to a bad credit score and coerce you to opt for a bad credit loan. Some of these reasons are:
- Not making credit card payments on time
Your credit history accounts for approximately 35% of your credit score. So, to avoid getting a poor credit score, you should ensure that you repay your credit card debt on time. - Making delayed payments
Apart from credit card bills, utility bill payments and rent payments should also be on time to reflect a good credit score. Unpaid bills are charged off, which works against your credit score. - Charge-off accounts
Accounts are put under a charge-off status when a borrower has not made any payments in a while and the creditor doubts their intention to repay the balance due. An account in the charge-off status significantly hampers your credit score. - Collection accounts
Before charging off an account, creditors usually sell-off your debt or hire a third-party debt collector to persuade you to repay your dues. Usually, collection agencies employ various methods to nudge you to clear your account balances. - Filing for bankruptcy
This should always be the last resort, as it causes possibly the worst effects on your credit score. Bankruptcy can lower a good credit score by around 200 points. - Defaulting loan repayment
Not repaying your loan on time can severely affect your credit score, as it has a similar impact to that of a charge-off. When you default on the repayment installments, it sends a message to the lending agencies or banks that you might bring them a credit risk and your loan might not be repaid in total. This affects your reliability as a borrower, and financial institutions might refrain from granting you a loan in the future. - Judgments
Both paid and unpaid judgments are harmful to your financial health, but an unpaid judgment has worse effects on your credit score. Lending agencies take judgments into consideration because it tells them that you were a defaulter and the law had to be involved to get you to clear your debts. - Foreclosure
Just like a loan default, the foreclosure will tell a lending agency that you are a huge credit risk. This is because it showcases your inability to make your current payments. You losing an asset will add to the hesitance of a lender as it reflects negatively in your credit report.
Where can you get a bad credit loan?
You can apply for a bad credit loan from a bank. In most cases, a bank will deny a loan or charge you a high interest rate, but if you are seeking financial assistance at an economical rate of interest along with some flexible qualifications, you can opt for other alternatives to get a bad credit loan. These alternatives include the following:
- Try for a home equity
If you are a homeowner and have sufficient equity in the property, you can opt for home equity. With this, you can apply for a tax-deductible line of credit that is offered at a low rate of interest, and you can choose to spend this amount in any manner you deem fit. That being said, choosing to tap into home equity brings upon the risk to your property, but that is a cause for concern only if you’re unable to repay your loan. If you make regular payments toward loan repayment and have a reliable income source, home equity is an ideal and inexpensive method that lets you get a loan irrespective of your credit score. - Seek help from a credit union
As you might know, credit unions are Non-Profit Organizations (NPOs) that offer customers with incredible services at a low fee. In functionality, they are similar to banks, but there are several differences between the two. Credit unions are operated and owned by members who primarily have many things in common. For instance, the members of a credit union either work in the same industry or reside in the same country. You can research online for a credible nation-wide or local credit union. Then, you can get in touch with the credit union and discuss your chances of getting a personal loan. It’s a great idea to compare loans from different financial institutions to help you make an informed decision and pick one that provides you a loan at the lowest possible rate of interest. This is an important step to follow before signing a contract. - Get help from a lending platform
Various lending platforms use advanced technology and innovative criteria, making them ideal alternatives to traditional lending agencies and financial institutions. These platforms include peer-to-peer (P2P) lenders who allow you to directly borrow a sum from an individual and not an institution. Under this scheme, borrowers put down the details in their loan listing, and these details include the amount they are seeking and the purpose of applying for a loan. Before approving an application, the investors carefully review this listing and pick those that meet their criteria. P2P lenders carefully examine all the applications and analyze your credit standing. Although your credit score is an important factor to secure finance through this method, it is a better alternative as an individual is much more empathetic toward your situation than an institution. - Approach friends or family members
If the online peer refuses to lend you the money that you need, you may reach out to your family or friends. After all, who would help you better than your near and dear ones in times of need? That being said, you must treat a loan that you take from them as a business transaction to avoid any misunderstandings. You can have a proper written agreement that mentions the terms of the payment, the rate of interest, and the collateral against which you are taking the loan. Also, it is best to have clear terms on the consequences of failure to repay your loan. If needed, you can also include a promissory note template from a portal like LegalZoom or Rocket Lawyer.
It is advisable to keep the terms of a loan taken from family or friends beneficial for all the parties involved. Plus, this should be your last option because nobody would want to end up in a sour relationship with their dear ones only because of bad credit. Also, if you are borrowing to buy a home, having the loan secured will help you get the best benefits of the mortgage interest deduction. You can conduct further research for additional details on the terms related to the managing and registration of a home loan from a relative. - Look for a co-signer
Last but not least, if you do not have a family member or friend who is ready to give you a loan, you can look for somebody who has good credit and have them co-sign a loan. It implies that you’re applying for the loan jointly, so if you fail to repay the debt, the bank will hold the co-signer responsible for the complete repayment of the loan. Additionally, the repayment history of both you and your co-signer is recorded for a co-signed bad credit loan. So, if you fail to pay your monthly dues on time, it would hamper the credit score of the co-signer as well.
If none of these options work for you, you can seek other options like getting a loan against your life insurance plan or retirement account. Payroll advances are another option to get a bad credit loan, but they should be the last options on the list. Turn to these alternatives only if everything else fails. In all cases, you should work toward improving your credit score so that you can get a loan at a low interest rate. You can do this by following some simple tips like paying all your bills before the due date, rectifying any credit report errors, and not maxing out your credit card limit. A few other practical tips to enhance your credit score is to pay your rent on time and pay more than just the minimum amount due on your credit card every month.
Are bad credit loans safe?
You should always be extremely careful when seeking a loan, and if you have bad credit, it is certainly a matter of concern as you don’t want to worsen your credit standing. Here are some tips to ensure that you get a bad credit loan from a legitimate and reliable lender:
- If a lender gives a 100% guarantee of your approval, doesn’t consider your income while granting the loan, and/or cannot be located on the Better Business Bureau, something is not right. These are big red flags that you should be particularly careful about.
- Carefully weigh the pros and cons before you decide on getting a bad credit loan from a lending agency, and also ensure their reliability to avoid putting a dent in your already low finances.
When it comes to answering the question of “Are bad credit loans safe?,” it depends on the lender. If you reach out to a well-established company, analyze their online reviews, and get a loan from an establishment that has been in business for a while, the loan is safe. However, given the overwhelming number of companies offering bad credit loans nowadays, you must carefully ensure that you do not end up approaching a company running a scam. You can prevent getting scammed by watching out for signs like being told to make a wire transfer upfront to initiate the paperwork.
A bad credit score creates a negative impression on lenders, so regardless of the reason for an unfavorable score, you must work on improving it to be seen as a creditworthy borrower.
