How to Find the Right Bad Credit Loan

A low credit score can hamper even the most fiscally prudent and honest of people.

Buying a car or a home, renting an apartment, or obtaining a credit card almost always depends on the quality of the potential borrower’s credit. However, bad credit will keep those potential borrowers from obtaining most types of loans.

Bad credit loans don’t necessarily mean they are bad. These loans exist because people with bad credit still need cash, and a loan is one way to obtain that cash. While these loans typically have a poor reputation, there are bad credit loans that offer reasonable conditions.

A bad credit loan can be broken down into two general groups: secured and unsecured. A secured loan is one in which the borrower offers up collateral against the loan, such as a car title loan.

Lenders do not like risk. The higher the risk, the more they will charge the borrower in terms of fees and high-interest rates. An unsecured loan is a high-interest, no collateral loan in which the lender assumes most of the risk. A payday loan is one example of an unsecured bad credit loan.

Finding the right bad credit loan depends on the borrower’s circumstances. If the borrower is an established, working individual with equity in their home or car, then a secure bad credit loan makes fiscal sense. On the other hand, those without a job or any type of collateral are looking at very high interest, unsecured loans.

The steps below outline how a borrower can go about finding the right bad credit loan

Do a Personal Finance Audit

Before taking out a bad credit loan, a borrower should do a personal finance audit to see what assets they have, what they can afford to pay each month, and how much money they need to have.
A bad credit loan will, no matter what, have a higher interest rate than loans given to those with better credit.

Every borrower must first ask themselves, “Do I need money now?” If the answer is an unequivocal “yes,” then proceed. On the other hand, if there is any hesitation, the borrower should seek out other, less risky, avenues for acquiring cash.

Next, borrowers must make a detailed monthly budget. Borrowers should outline every single monthly expense, as well as all incoming monies. A borrower will have a much clearer picture of what they can afford to pay every month for loan installments.

Lastly, a personal finance audit will help determine what type of bad credit or no credit loan is right for the borrower. For instance, an online, unsecured bad credit loan may work for those who need time to pay it off. On the other hand, a payday loan might be better for those who can pay it off immediately but cannot afford a series of monthly payments.

Know the Types of Bad Loans

Borrowers can avoid higher rates by putting forth collateral. A home equity loan or a car title loan are examples of secured loans. The amount of equity the borrower has in the asset can limit the total amount of a loan, as they can only get a loan based on a small percentage of that equity.

The advantage with a secured loan is that interest rates will be lower because the lender can acquire the borrower’s asset if they default on the debt.

The downsides are that a borrower must have an asset of significant value. The maximum amount that borrowers with bad credit can get from secure loans is often not worth the risk. This is why unsecured loans, below, may be a better option for some borrowers.

Understand

An unsecured loan is riskier because the interest rates are higher. There are also more fees attached to the loan, usually, because the lender is assuming all the risk. Payday loans are an example of unsecured loans, although there are many online lenders offering unsecured loans, too.

People who have few assets, little to no equity in their car or home and very bad credit can shop around for an unsecured loan online. A job is often a requirement to obtain one of these loans, either online or at a payday loan storefront.

Payday lenders will ask for access to the borrower’s bank account, so they can deduct the principal, plus interest, once the borrower’s next payday rolls around. Online lenders will get borrowers to fill out an application, and, once approved, many people get their loan the same day. But, beware sky-high interest rates on these unsecured loans.

Research

Before going to the nearest storefront advertising bad credit loans guaranteed approval, try going online first. In recent years, online lending is fast becoming a legitimate and effective way to secure all types of loans, particularly bad credit loans.

There are many online tools that allow potential borrowers to view a compilation of the best available rates. Once a borrower finds a loan that seems to fit their criteria, they can then go to the lender’s website to fill out an application. Many reliable online sites will offer lender reviews and tips, which every borrower should research before taking out an online loan.

Use a Loan to Repair Credit

Before making a final decision on a loan, a borrower should understand which loan types will repair their credit, and which ones will not. For instance, pawn shops do not report any information to credit bureaus. So, while a pawnshop might be a convenient way to obtain fast cash, it will not affect a person’s credit score.

Online bad credit loans will affect credit scores, as will any sort of home equity or title loan. If a borrower budgets properly to make their monthly payments, these loans can be a good way to repair credit at a reasonable interest rate.

As well, there are several credit cards geared towards those with bad credit looking for some quick cash. These typically have low credit limits and require a monthly fee, usually up front. These will also help a borrower’s credit score.

Apply for a Loan

Once the borrower understands the type of bad credit loan to get, the only thing left to do is apply. In most cases, funds are available anywhere from 24 hours up to one week.

Unless utilizing a payday loan, borrowers should be prepared to pay an installment one month from the day they received the loan. Remember, the point of the loan isn’t just quick cash; it is also for repairing a credit score. All borrowers should be prepared to make timely payments. Otherwise, they should reconsider getting the loan.

While many may view a bad credit loan as something to be avoided, they are a necessity for many individuals. Therefore, anyone in the market for a loan of this type should at least use it to repair their credit. Obtaining a better credit score is the only way to avoid bad credit loans and improve personal financial health.