We’ve all heard the horror stories: Bad credit will destroy your chances of getting a loan. But is this true? No. Bad credit can harm your chances of getting favourable terms on an auto loan, credit card or a mortgage. Make no mistake about it, bad credit is something to be avoided. It follows you like a shadow, and if you don’t take corrective steps it can prove disabling. Some of the problems that people can experience with poor credit include limited access to emergency money, emotional trauma and strained relationships. You will also be subject to more expensive car insurance, difficulty in refinancing a mortgage, higher property insurance premiums, and increased interest rates from borrowers. Perhaps the most significant problem with bad credit is lower levels of personal disposable income. The more you are liable for in interest repayments, the less cash you have in your back pocket.
How to Get a Loan with Bad Credit?
Assuming you have a low credit score, it is still possible to get a loan provided you meet the qualifying criteria. There are many different credit scoring models out there. The most popular model is the FICO score. The lowest score on this model is 300 and the highest is 850. If we consider VantageScore, credit scores typically range from 501 through 990. With FICO, bad credit is defined as any score below 600. Poor credit is a score between 600 – 649, and fair credit ranges from 650 – 699. Good credit is considered with scores of 700 – 749 and excellent credit is any score above 750. You can easily access your credit score by obtaining a free copy of your credit report from all of the big 3 credit bureaus in the United States: Experian, Equifax and TransUnion.
With your credit score in hand, you can approach a prospective lender with confidence. There are ways and means of sifting through loan companies when making your applications. Try to pick a lender that offers full transparency about rates and associated fees. More importantly, flexible terms should also factor into the equation. Financial advisers caution borrowers about predatory lenders. By signing up with loan sharks, you can trap yourself with high interest and difficult repayment terms. Loan comparison shopping is a great way to get a feel for the types of offers available to you. You simply enter the amount of the loan that you’d like to apply for, your ZIP Code, your credit rating, and your monthly income. Once the necessary data has been input, you will see a host of providers willing to work with you.
What does poor credit mean to lenders?
Each lender perceives credit differently. For example, if your credit score falls below a certain level, many high-end lenders will not offer you credit. Bad credit does not necessarily prevent you from being considered for credit. Certain loan providers will work with people who have credit scores of 640 or less. Most lenders will consider this to be an average score, but the lower your number, the riskier you are considered. As your credit score plunges further, your options are few and far between. There may be providers willing to work with you, but the terms of engagement become unfavorable. Payday loans are great ways to access emergency cash, but predatory behavior among loan providers is something to be mindful of.
A person with bad credit loan options is not a victim. There are many lenders competing for your business, and you can scrutinize these offers for the best deal. Typically, the APRs will range between 230% to 2,330% – but you don’t need to accept these offers. The reason why the interest repayments are so high is that the payback period is so short. For example, assume that your principal loan amount is $1,000 in short-term financing from a bad credit loan provider. They may agree to give you 60 days to repay the loan with $200 in interest repayments. That amounts to $1,200 in total, which is 20% interest. However, the APR figure is significantly higher since it’s calculated over 2 months, not 1 year.
Short-term loans are useful if they are required for an emergency. Unfortunately, too many people fall into the trap of excessive borrowing at unfavorable rates. If the loan extends beyond its due date, further fees are incurred and this simply digs a deeper hole for the borrower. A report by the Consumer Financial Protection Bureau (CFPB) discovered that an amazing 67% of payday loans were issued to repeat borrowers. What this means is that the interest repayments exceeded the principal in most cases – not a favourable situation for any borrower. Reputable bad credit loan providers typically issue loans between $1,500 and $10,000. These providers have APRs in the range of 25% to 36% depending on your credit. They typically prefer secured loans, but it is still possible to acquire unsecured loans. Clients should always check for things like Better Business Association (BBA) accreditation, the number of branches available and what types of credit scores they cater to. Your paycheck is used to gauge your ability to make payment on these loans.