How To Get Unsecured Personal Loans With Bad Credit – A Borrowers Guide

unsecured personal loans

Bad credit can seem like an obstacle to obtaining a loan, but it doesn’t have to be.

Like it or not, consumer credit is an important part of the American economy, but this was not always the case. Throughout most of the 19th century, only the wealthiest people used credit to purchase items that were not true necessities, a practice that was viewed by many as unwise or even immoral. Credit was typically limited to mortgages although farmers might owe a local storekeeper for seed or other goods.

By the 1920s, however, an increasing number of Americans began using credit to purchase cars, furniture and appliances; the trend accelerated in the years following World War II. With the increased use of credit came a shift in the relationship between borrowers and lenders.

Prior to the 1920s, most lenders knew borrowers personally — they were often neighbors or long-time acquaintances, so lenders knew whether a borrower would be likely to repay a loan. Once the personal relationship disappeared from most credit transactions, lenders began to rely on the credit history of borrowers — which is why people with bad credit sometimes have trouble obtaining approval for an unsecured personal loan.

Why Bad Credit Increases the Difficulty of Obtaining an Unsecured Personal Loan

When it comes to personal loans, the operative word is “personal.” Personal loans can be used for virtually any purpose that is legal, including debt consolidation, family vacations, medical expenses or car repairs. They are not intended to be used to pay off an illicit gambling debt or finance a business, and it is unwise to go into debt for an expense that could be delayed without seriously affecting the quality of your life.

Personal loans can be unsecured or secured. If they are secured, this means that you have provided collateral, which is a tangible asset that the lender can seize or claim if you fail to repay the loan. If you have ever financed a car or a home, you have taken out a secured personal installment loan; you repay the loan through a series of installments or fixed monthly payments. If you have ever used a bank-issued credit card to purchase a new television, you have incurred an unsecured debt; although you have a tangible asset, the bank will not repossess the television if you fail to pay your bill.

Because unsecured loans are not backed by collateral, the lender has only your promise to repay. Your promise is typically in the form of your signature on a loan contract, which is why these loans are sometimes called signature loans. Unsecured personal loans are riskier for lenders to make, so they may carry higher interest rates, require better credit scores or both.

Traditional lenders typically use either your FICO credit score or VantageScore, but according to StudentLoanHero.com, about 90 percent of them rely on FICO scores. Although there are differences in the algorithms used to compute the two scores, your history of paying bills on time is of extreme importance. For example, paying a single credit card bill more than 30 days late can lower your credit score by as much as 100 points. How much you owe compared to your credit limit is another factor; ideally, the balance owed on revolving credit accounts should not exceed 30 percent of their limits. The amount of time that your accounts have been open is also considered, and too many newly opened accounts could be construed negatively. Finally, the types of credit can affect your score. Lenders prefer to see a variety of credit products such as a mortgage, credit cards, personal installment loans or auto loans.

Lenders are free to choose the minimum FICO score they require for an unsecured personal loan. Over the years, careful studies have been done to link FICO scores with the odds that borrowers will become delinquent on their loans. According to MyFICO.com, scores are grouped into five categories.

• Scores of 800 or more are classified as exceptional and borrowers are considered low-risk. Approximately 1 percent of these borrowers may become delinquent.
• Scores of 740 to 799 are considered very good and low-risk, with roughly 2 percent of these people considered likely to default or become delinquent.
• Scores between 670 and 739 are classified as good and borrowers are considered medium-risk. Approximately 8 percent of these borrowers may become delinquent.
• Scores of 580 to 669 are considered fair. The risk is classified as medium-high; roughly 28 percent of these borrowers are likely to default or become delinquent.
• Scores of 579 or below are classified as poor or bad. Borrowers are considered high-risk; about 61 percent of them are likely to default on their loans or become delinquent on their payments.

Most lenders consider your credit past as a good indication of how you will handle your future obligations. Since their experience has shown that borrowers with low scores tend to be less likely to pay their bills in a timely manner, lenders want to protect themselves from loss whether they are offering online personal loans or storefront installment loans. Therefore, after weighing all the risks involved, many lenders consider unsecured personal loans with bad credit to be a product representing significant potential for loss.

Unsecured Personal Loans with Poor Credit Are Not Impossible to Find

Although it can be more difficult to find personal loans with bad credit, it has become easier in recent years. Economic issues, unemployment and the rising cost of health care have had an impact on the credit scores of many Americans. This has led to an increase in the number of lenders willing to make in-person or online personal loans to people with credit difficulties. If you are wondering how to get a personal loan with bad credit, the following tips may help.

• First of all, do not prejudge your credit. You need to know exactly what your credit history shows. You are entitled to a free credit report annually from each of the three major bureaus. There are several websites that offer the service, but you can also request your credit history by visiting AnnualCreditReport.com. You can request a report from all three agencies at the same time, but you might want to consider spacing them out. If it has been several years since you have reviewed your credit file, you might discover that negative information has fallen off. However, you might also find errors that are affecting your score and need to be corrected.
• Compare the annual percentage rate, fees and payment terms before committing to a loan. Online personal loans make it easier and faster to conduct comparisons. In addition, you can complete the loan application from the privacy of your own home at whatever time is most convenient for you.
• Gather all of your information before you begin the application process. The requirements vary by lender, but you can typically expect to be asked for your Social Security and driver’s license numbers, your employer’s contact information, your earnings or sources of income and your banking information.
• When completing applications for unsecured personal loans, borrowers should answer all questions truthfully and completely. If you do not understand the question, see if the lender accepts loan applications by phone or has a number you can call for clarification. Blank spaces on your application could delay a credit decision, but the lender could also just reject your application and require you to start the process anew.
• Borrowers should carefully evaluate their finances before applying for personal loans with bad credit. Should you be approved for the loan and default, you could damage your credit even more. Make sure that you can cover all of your normal expenses and the payments on the loan before you apply.
• Evaluate your other options. Sometimes, borrowers have no choice other than to apply for unsecured personal loans. However, before taking on any type of debt, you should explore other options fully. Could you raise the money you need by selling something that you no longer use? Is there a relative who might be in a position to loan you the money? Could the expense be postponed until you could pay for it in cash? Would your employer be willing to give you a salary advance? If any of these options are possible, explore them before you choose an unsecured personal loan.
• Never borrow more than you truly need. If the lender offers you a loan for more than you need, it may be tempting to accept it. You might think that you can put the excess funds into savings or use them to help make the payments on the loan. However, most people find that the extra money seems to magically disappear, leaving them owing more than they would like.
• Different types of unsecured personal loans with bad credit are available. For example, payday loans are unsecured personal loans that are widely available for people with poor credit. Payday loans typically require borrowers to repay the loan in a lump sum on their next payday. Personal installment loans allow you to spread the repayment over several months, and since the payments are equal or vary by only a penny or two, it may be easier for you to work them into your budget. Choose the type of loan that works best for your income, payday schedule and budget.
• Read your loan contract carefully and completely before signing. Virtually all lenders, especially those offering online personal loans, are happy to provide you with a complete disclosure of their terms, including the annualized percentage rate of interest, potential late fees and options for refinancing your loan. Ask for clarification of anything you do not understand, and never sign a contract that contains blank spaces.

Take Steps to Rebuild Your Credit

Unsecured personal loans can be a lifeline for borrowers who have an urgent, temporary need. However, borrowers who are seeking personal loans with bad credit should consider the steps they can take to improve their credit scores. As demonstrated above, the higher your credit score, the less risk lenders feel they are taking, and the less risk that lenders are taking, the lower the interest rate can be. This is why people with excellent credit pay much less in interest on unsecured personal loans than people with impaired credit.

The first step is to obtain your credit history and review it. Here are some common errors found on credit reports.

• Late payments that are older than seven years
• Accounts shown as closed by the lender that were actually closed by the borrower
• Collections account that was paid but is still listed as unpaid
• A loan or credit card that does not belong to the borrower or on which the borrower was not an authorized user or co-signer
• Paid tax liens that were paid over seven years earlier
• Accounts discharged in bankruptcy that are still showing a balance and listed as active
• An address that was never used by the borrower or at which the borrower never lived
• Name is incorrect
• Employer information is incorrect

If you find an error involving an open account, see if you can resolve it by calling the lender or credit card company directly. Otherwise, you can dispute errors by notifying the credit reporting bureau in writing. The Federal Trade Commission provides a sample dispute letter as well as detailed instructions for disputing errors.

Make sure that you remit payments on time. If you mail payments, be sure that you allow sufficient time for your payment to arrive and be posted before it becomes overdue. If you have overdue payments, get current as quickly as possible and remain current. You might consider setting up automatic online payments, recording due dates on your calendar or asking lenders to send you advance payment reminders.

If you are finding that your debts are causing difficulty in making ends meet, consider contacting a legitimate credit counseling service. People with credit difficulties should seek one of the free options offered by various nonprofit agencies, extension offices, credit unions and religious organizations. Choose a service that is accredited by the Financial Counseling Association of America or the National Foundation for Credit Counseling. These services can frequently secure concessions from lenders that borrowers cannot; for example, they may get interest rates lowered substantially or work out a plan to have your account brought current immediately. Your participation in credit counseling will not affect your FICO score, according to MyFICO.com.

Learn More Unsecured Personal Loans

If you want to learn more about online personal loans, loans for people with credit difficulties or other topics related to personal finance, explore the library of helpful articles posted at the Personal Money Store.

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