What is a bad credit loan?
A bad credit loan is normally designed for people with poor, low, or no credit history at all. The bad credit loans are particularly intended for people who have applied for a loan and have been turned down by their bank, a financial institution, or any traditional loan lender.
Two common reasons behind a loan application rejection are outstanding payments and/or any credit agreements that were not met on time, or simply the lack of credit history, which is something that makes the bank or the loan provider uncomfortable in approving any credit.
This type of loan (bad credit loans) typically come with higher interest rates and more restrictions than other types of loans as this method is leveraged by lenders to reduce the risks of the loan not being paid back. However, if used in the right way, bad credit loans can be quite useful and can help you get through some very critical financial moments.
Bad credit loan doesn’t necessarily mean ‘bad’ or low income. There are various occasions where people are denied a loan even though their income figures are quite substantial. In cases as such past financial adversities or lack of credit history seems to be the main reasons.
In a nutshell, bad credit loans are most suitable for those who are not eligible for a personal loan from a traditional lender but are still in need of borrowing money to cover urgent financial commitments.
Bad credit loans is a term used from third party loan lenders and it’s used unofficially by people involved in the industry. You would not expect to see companies pitching bad credit loans per se.
How to Get A ‘Bad’ Credit Loan
First off, gather all of your personal financial information as this is what you will be asked first thing by all your potential lenders. After doing your research compare existing offers and apply only for loans that are likely to be approved. Bear in mind that every application is adding up to your report and can negatively impact your credit, further lowering your score.
You also want to consider checking your eligibility before applying to get a rough estimate of what chances you stand for getting the approval. There are credit reporting providers where you can check your eligibility rating for free and no risk of affecting your credit score.
If your financial circumstances are grave and getting a loan approved is of utmost importance, consider a high-risk loan. For those in urgent need of large amounts, high-risk loans can be an option only if you are confident that you will be able to settle such a loan and don’t fall short of your payments.
1: Guarantor loan
One of your next of kin or very close friend officially promises to pay on your behalf in case you can’t make it. This guarantor would rather have a more than an average credit score as this will help you get way better rates and higher limits. The trade-off is that you put your assets (e.g. real estate) at stake and you lose them in case payment agreements are not followed.
2: Secured loans
The same principle applies here only difference you don’t need any guarantor. You simply use your assets such as home, vehicle, stocks, inventory as so-called collateral. You fall behind on your payments? And You lost your asset. A rather harsh policy but gives the lender confidence to offer you better rates and larger limits that you wouldn’t get anyway given your not so good credit score.
How to Improve Your Credit Score
Before applying for a loan you may want to consider improving your credit score. First and foremost register at your local electoral office with your current address as this is taken into consideration. It’s easy and free.
Try tying up any financial loose ends you might have by paying off old debts. Review all your credit reports for potential errors and dispute them. Errors occur quite frequently when running credit reports.
Minimize the number of hard credit checks counting on your credit history until your credit score is cured. You cannot start applying blindly for every loan plan being offered out there.
As mentioned earlier having no credit history can work against you as the lender will not be able to evaluate your credit and this will ultimately impact the outcome. Build your credit history.
Treat your due payments with responsibility. Consistently paying off your payments and in a timely manner shows to your lenders a reliable and trustworthy borrower.
Last but not least make sure you use the least amount of your available credit limit. The credit limit is there to support you but it’s a good practice to use on average less than 25% of your existing credit limit as this would be deemed as a positive sign from the institution which will assess your credit status.