How to get a loan with bad credit

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Accessing credit, such as a loan or a new credit card, has become more difficult this year. And if you have a credit rating that lenders think is “bad,” it’s even more difficult.

In response to economic uncertainty, banks have tightened household lending standards across all major categories in 2020, including mortgages, credit cards, cars, and consumer loans. Federal Reserve data

Lenders and Lenders use your credit score and details about your credit report to determine your creditworthiness or the risk they can take by lending you money. If you have a poor credit rating, lenders may find you more risky, making it difficult to get loan approval and favorable conditions.

For example, a poor credit rating can cause your mortgage lender to approve a loan for you at a higher interest rate. But even a small difference in percentage can cause you to pay. thousands more in interest during the term of the loan. And some lenders or credit card issuers may not approve you with bad credit at all, or may charge higher fees to offset your risk.

But bad credit doesn’t stay with you forever, and if you need to borrow money, there are still ways to get approval even with a low score… Here’s what you need to know:

Do you have bad credit?

To determine what you are eligible for and start improving your credit score, you should know where do you start of. You can view your own credit report, which the credit rating is based on, for free at AnnualCreditReport.com… During April 2021, you are eligible to receive a weekly free credit report from each of the three major credit bureaus – Equifax, Experian, and TransUnion.

Each lender sets their own standards for credit assessment, and one may judge your assessment differently than another, but you should have a general idea of ​​where you rank among the users of the loan. You can check your credit score free of charge through the online banking portal or from your credit card issuer, or purchase access from a credit bureau.

Credit ratings usually range from 300 to 850; The FICO ranks 300 to 579 as “very bad” and the Vantage Score ranks 300 to 600 as “bad” or “very bad.”

Credit rating FICO grading range
Very poor 300-579
Fair 580-669
Okay 670-739
Very good 740-799
Exceptional 800-850
A source: MyFico
Credit rating VantageScore Range
Very poor 300-499
Poor 500-600
Fair 601-660
Okay 661-780
Excellent 781-850
A source: Experian

These ranges can greatly affect the amount of interest you pay on your loan. For example, someone with a FICO rating of 500-589 will pay 16.4% per annum on a new five-year car loan, while someone with a 690-719 rating will only pay an average of 5.39%. You can use this calculator from FICO to see how interest rates differ between different credit ratings and loan types.

Another thing to keep in mind is that you don’t need to have a history of loan misuse to end up with a low credit rating. If you’re just starting out with no credit history, your thin credit profile can also lead to a poor credit rating, making it difficult to access products that can help you build a higher credit rating. Achieving a high credit rating takes years of timely payments and prudent use of credit.

Be careful

If you have a bad credit history, be careful which lenders you go to: potential fraudsters and illegal lending companies may see a low credit rating as a target.

Look out for any company that guarantees that you are eligible for a loan before applying, or that uses phrases such as “Bad credit? No problem ”and“ Get money fast ”. Federal Trade Commission warns. These types of lenders can charge large hidden fees, or even use your information for identity fraud.

Professional advice

Bad credit can make you an easy target for predatory lenders. Be wary of any illegal companies or predatory lending offerings that could lead to more lending problems and increased debt in the future.

Payday loans and title lenders are other common types of lending that you should avoid at all costs. These lenders often target consumers who have few credit and loan options… But they also charge astronomical interest rates which, for many borrowers, could lead to an ongoing cycle of unpaid, escalating debt.

Turning to predatory lenders, “you’re going to pay 300-400% per annum, which is awful,” says Michael Sullivan, personal financial advisor to the nonprofit financial education organization Take Charge America. On the contrary, current average annual income (or annual interest rate, the real annual cost of your loan) is 14.52% for credit cards and 9.5% for personal loans.

How to get a personal loan with bad credit history

1. Contact your current bank

If you have an established banking relationship with a financial institution, try using it to get a loan, even with a bad credit history

“It’s very important to have a relationship with a financial institution that listens to your needs,” says Felicia Lyles, senior vice president of retail operations at Hope Credit Union, a community development financial institution targeting a typically underserved population.

This tactic may not be as useful for large national banks, but it can at least serve as a starting point for determining that tariffs or products that you can claim. Then you can compare with other financial institutions. Smaller institutions like credit unions and public banks are more likely than national networks to work with you to find a product that suits your needs, especially if predatory lenders before payday or title loans are the alternative. Credit unions have membership requirements, often based on your location, employer, or other criteria, but you may find those criteria are easier to meet than you think, or you may find ways to work around them. Use this locator for finding credit unions in your area.

2. Find a collaborator

Find someone in your life that you trust – be it a parent, friend, or family member – who might want to subscribe on your behalf to guarantee your loan.

However, this decision should not be taken lightly. Co-signing someone’s loan means that if the borrower defaults on its obligations, the co-signer is responsible for repayment. The facilitator must not only be willing to make the loan payments on its own, but may also be liable for any late fees or penalties that could affect their own credit rating.

Co-signing can often be a dangerous financial practice, warns Jill Schlesinger, CFP host of the Jill on Money podcast. “If someone cannot get a loan, there is usually some reason for it,” she said earlier. Marketplace Morning Report podcast. “If the lender is unwilling to lend money, why would you want to?”

If you choose to use this option, discuss all the details of your repayment with your signer in advance, review the details of your loan agreement, and examine the rights of your state co-signer. Your co-signer must be aware of all the risks involved, be willing to repay the loan themselves, and make an informed decision to co-sign before applying for a loan.

3. Explore peer-to-peer lending

Peer-to-peer lending is an alternative to traditional loans. Instead of borrowing from a bank or credit union, you can use an online service like Lending Club to find investors willing to lend money to borrowers.

Loan terms vary and often a loan decision can be obtained within a short time frame. Your terms are still determined by your credit history and you must pass a credit check to qualify for a loan, but peer-to-peer lending can help you qualify more easily or get a higher interest rate than a traditional bank loan, even with bad credit.

Typically, peer lenders report to the credit bureaus, but double check the terms of your loan agreement so you can work to improve your credit score while making timely payments every month.

4. Consider alternative payday loans.

Instead of risking astronomical interest rates and current debt with payday lenders, look into payday loan alternatives (PALs) offered by credit unions.

These small loans range from $ 200 to $ 1000 for one to six months. according to standards from the National Credit Union Authority (NCUA). You will pay high interest rates that may even exceed 30% (higher than even the fees for many credit cards), but if you develop a reliable debt repayment plan, PAL can be a viable option – and yet much more affordable than payday loans.

5. Check loans from lenders.

If you don’t need immediate access to new money, a loan from lending institutions can be a great way to create a healthy payment history – a major factor in determining your credit rating.

Instead of receiving cash up front, which you will be paid back over time, you will have a set term and loan amount, during which you will make monthly installments. The lender reports these payments to the credit bureaus. Each month, this money will be credited to an account that you can access at the end of the loan term.

“In fact, you pay yourself,” says Christina Livadary, CFP, Mana Financial Life Design, a financial planning firm in Marina Del Rey, California. “Then, after the expiration date, you get that money back and you can use it however you want.”

Bottom line

Access to credit with a bad credit history is definitely a tough battle, but finding a lender is possible, even as many are tightening lending standards amid the ongoing recession.

If you need access to cash and have a bad credit history, take the time to research your overall financial situation: develop a budget you can stick, organize your debt balances, carry out investigations patience or help in adversityand develop a plan. And given today’s uncertainty, make sure that any loan you are considering is driven by a real need. You do not want to accumulate more debt for expenses that can wait, for example Home improvements… Keep your long-term financial health in mind, too: Set up a small emergency fund if you don’t have a financial safety net and research debt repayment strategies that might work best for you.

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