Bad Credit Loan Information
If you have a bad or tarnished credit history, you have fewer options when it comes to getting a loan, but they are still readily available. Bad credit loans usually carry a higher interest rate than do good credit loans, but the positive thing is if you pay them back diligently, you will indeed raise your credit score.
Bad credit loans usually come in the form of
secured loans, that is, you pledge collateral like a car in case you can’t pay the loan back, versus
unsecured loans in which the bank checks your credit history and decides to simply take your word for it. You can still take out an unsecured loan with bad credit, but the interest rate will be significantly higher than if you use a vehicle or other possession for collateral, unless someone co-signs for you.
Most people inquiring about bad credit loans are usually interested in what banks call “personal loans,” versus “lines of credit.” Personal loans range from $1,000 to $100,00 with terms of up to 10 years, though most are only for a few thousand dollars and only for a term of one to two years. Another term for personal loans is “emergency loans,” that is, it’s a fixed loan amount to help pay for something, not a line of credit for a house or car, and not a revolving loan that is used to
consolidate other loans.
Keeping that in mind, your main options for getting a personal loan are the following:
- Secured personal loan - If you have a significant possession such as a vehicle which you can pledge as collateral, this is one of your best options. Your interest rate should be agreeable, and if you pay back the loan diligently, you will have helped in building back your credit.
- Unsecured personal loan with co-signer – Another best option. Ask a parent, close family member or close personal friend with a good credit rating, established credit history and solid financial standing to be your cosigner. Try to find a loan option that won't require your cosigner to put up collateral. While this may not always be possible, the idea of using a cosigner is to secure a loan based on that party's superior credit history. Individuals with superior credit history should qualify for unsecured loans. In other words, you might be able to use your cosigner's good financial standing as a bargaining tool to get a lower interest rate or better repayment terms, since if you don’t make payments, they will be the ones responsible.
- Unsecured personal loan – Only if cant do either of the two mentioned already. If you have damaged credit, the bank will understandably only offer you a loan with a high interest rate to cover their risk, even if you made all you payments on time prior to your credit accident. They may not be able to take your car if you can’t make the payments, but you will end up paying a lot more on interest than if you pledged collateral.
- Payday loans – Three words: don’t do it. This is by far the most costly way to borrow cash, and you are in most cases limited to only $1,500. If you absolutely have no choice, it’s practical, but in most cases you should steer clear due to the high interest rates.
The way payday loans work is the borrower writes a postdated personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower's next payday. Or, with the borrower's permission, the company deposits the amount borrowed - less the fee - into the borrower's checking account electronically. The loan amount is due to be debited the next payday. The fees on these loans can be a percentage of the face value of the check: say 15% - or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or "rolled over."
Sound like a decent idea, right? Wrong. Let's say you want to borrow $200 until you get your next paycheck in two weeks. You write a postdated check to a payday lender for $230 (15% of $200 = $30 lender's fee(a typical percentage) + $200 loan amount = $230) and get $200 cash in return. The $30 interest you pay on the loan calculates to an Annual Percentage Rate (APR) of 391%! The payday lender may also charge you a one-time fee of $10 to set up an account. Obviously you’d be much better off getting a longer and even slightly greater loan at a reputable bank or financial company.
Borrowing Tips
- Borrow only as much as you need. If you are borrowing with a cosigner, don't give in to the temptation to use your cosigner's financial standing to get a bigger loan. Remember, larger loans mean more interest.
- Try to avoid using online lenders and payday loans if at all possible. They exist to take advantage of people who have problems getting loans from regular banks. With collateral to pledge or cosigner's help, you should have very little trouble securing a loan.
- Shop around for the best deals on loans: one with the lowest initial (origination) fee, lowest interest rate and best terms (no prepayment penalty, etc.)
- In the market for a new or used car but have less than perfect credit? Read out article on bad credit auto loans