A bad credit loan is a short-term financial solution for consumers who need to borrow money but have a poor credit rating or history.
Bad credit loans get their name from the fact that the borrower has a “bad” credit score that forces them to deal with very high interest rates when seeking a loan.
Used correctly, a bad credit loan can be the starting point for a financial turnaround. It should improve your credit rating and make you a more attractive borrower.
However, caution must be exercised. Bad credit loans are not a perfect solution to the problem. Interest rates on bad credit loans are higher, and the terms are short, usually a few weeks to five years, which means you have to commit to finishing what you started.
There are other options to turn your financial situation around, such as a debt management plan or a nonprofit debt settlement service. It would be wise to seek the advice of a nonprofit credit counselor to create an affordable budget for your ability to repay and decide whether a bad credit loan solves a problem or just adds to your troubles.
Types of loans for bad credit
Finding an affordable bad credit loan can be a challenge, but there are many options. If you look hard enough, you can find an appropriate loan for almost any situation. The loan may come from your regular bank, but more affordable interest rates and more flexible eligibility requirements can probably be found with these options:
Loan with co-signer
If you know someone with good credit, ask them to co-sign on a bad credit loan. With a qualified co-signer, the lender will set the terms of the loan based on your co-signer’s credit score rather than yours. The co-signer then becomes responsible for repayment as well.
All payment information will be recorded on both your credit report and your co-signer’s credit report, so if you default on the loan or are late with your payments, you will both suffer. If you make your payments on time, your own score will improve, making it easier for you to get future loans without a cosigner.
If you have equity in your home, you can apply for a loan or a mortgage line of credit. Your home is used as collateral, and loans can be obtained regardless of your credit rating. The interest rate is usually low because the loan is secured by the home. In addition, the interest you pay on a home equity loan is usually tax deductible.
It’s important to remember that tapping into your home equity puts your property at risk if you don’t pay off the debt. But if you are disciplined and have a reliable income, it is an inexpensive way to borrow from a reputable lender.
This option is probably the last one you should consider. Payday loans are often called “predatory loans” because the lender typically charges 399% interest with a two-week repayment period.
This is not a printing error. You pay $15 for every $100 you borrow. These loans are limited in most Canadian provinces to 50% of your salary because you MUST pay it back in full with your next paycheque.
This represents an annual interest rate that can exceed 300%! So you should definitely keep this option as a last resort. As long as you are not a repeat offender, there should be a private lender willing to give you an online personal loan with much more flexible terms.
Online personal loans
These lenders operate almost like banks that don’t have offices. They work online and offer bad credit loans for things like debt consolidation and home repairs. Their main appeal is that they work quickly. They can make decisions in minutes and deposit funds into an account in hours or days. Many have no application fees or prepayment penalties.
Online personal loan applications are simple and easy to complete. Credit scores are only one part of the decision process, which can be a great option if you have bad credit or no credit. In fact, some personal loan lenders have their own credit model and do not use FICO scores.
Those that don’t look at your credit score are generally called “no-document loans” and work through a 90-365 day bank check. If you have made mistakes in the past that have undermined your credit but have good financial habits; getting an online loan is surely the perfect solution for you!
Repayment of loans for bad credit
The goal of a bad credit loan is often to pay off your debts while improving your credit rating. You will achieve both of these goals by creating a budget that will allow you to make payments on time each month.
The easiest way to do this is to set up automatic payments to your bank account. You may even get a small discount for doing so.
And if something unexpected happens, such as a reduction in work hours or loss of a job, let your lending institution know. They usually have programs to help borrowers in such situations.
Don’t dig the hole deeper by not making your payments. Private lenders often have options to allow you to reduce the amount of your next payments, or even defer them to the end of your payment schedule.
Alternative solutions for bad credit loans
If you find yourself in a financial emergency, there are alternatives that can help you take positive steps to make you a more attractive candidate for a loan.
The first solution is to follow a debt management program offered by a non-profit credit counseling agency. A debt management program could reduce the interest rate on your credit card debt to 8%, sometimes less.
This will help you reduce and eventually pay off your credit card debt, which often has the greatest negative impact on a consumer’s credit score.
The second choice, offered by a small group of non-profit credit counseling agencies, is non-profit debt settlement. If you qualify, the credit card companies involved allow you to settle your credit card debt by paying 50-60% of what you owe over a 36 month period.
However, nonprofit debt settlement does not improve your credit score because you are paying less than what is owed.