While it can make financial decisions more complex and expensive, people with “bad” credit (usually, a FICO score below 630) have options. Taking advantage of them can often have the additional benefit of increasing your credit score as a reward for stable financial behavior.
For example, loans. People with low credit scores sometimes think that it makes no sense to apply for a personal loan because there is little chance of getting approval. But that reasoning ignores a crucial recent change: the rapid growth of available lenders, including those that specialize in services for those with lower credit scores.
Who are you going to call?
Make no mistake: The lower your credit score, the more likely you are to pay a higher interest rate for any loan you can get. This is because your low credit score tells the bank that you have a higher risk of repaying the loan in full. To protect the investment (and separate the pain from loans that are not refunded), banks charge higher interest rates.
That is why one of the first questions to consider is whether you need an external lender at all. For some people, a loan from a family member may be a viable option, and if your credit score is too low, it may be your only option. Treat the transaction as you would with a professional lender, with clearly defined terms (such as the duration of the loan, and interest rate) in a written document. And never make a loan contract that could jeopardize your future relationship with that person.
If you cannot find a member of your family to lend you money, another alternative would be to ask them or another person to sign a loan jointly. But remember: the guarantor is accepting the legal obligation to return the mortgage on your behalf if you do not pay it. Here is another case where you should not risk jeopardizing a friendship or family relationship if you cannot pay your loan.
Testing an online lender
If those private options are not available, you can look for alternative lenders that offer the lowest rate you can get.
Credit unions, for example, can often be a better proposal than traditional banks. And because they are smaller and are non-profit organizations that work for the benefit of their members, you may be able to get lower rates and more personal customer service. A Google search for “credit union” and the name of your city or county should show the credit unions available in your area.
Another option is a point-to-point lender (P2P) online. P2P works as an online platform that matches it with individual lenders who are real people, not banks. With a P2P lender, you may have a better opportunity because, unlike more traditional lenders, they may consider more than your low credit score to sign your loan.
An essential advantage with P2P and online lenders is that your credit score will generally not be negatively affected if you are simply researching and want to see what loan terms you can get. You will usually complete a pre-application that involves a “soft” query on your credit report that does not affect your credit score. But keep in mind that once you formally apply for a loan, lenders are likely to require a “hard” consultation, which can affect your credit score if you have too many difficult inquiries for a short period.
Reducing credit card debt (also known as debt consolidation) is the main reason why people seek agreements with P2P lenders. On the most popular sites, credit card payments account for 60 to 80 percent of all loans. They are significantly lower than the interest rates on their credit cards, saving them money throughout the loan.
But interest rates can vary widely. Sometimes you can get low one-digit prices, but they can also rise above 30 percent, depending on your credit score, income, and the reason you want the loan. While these lenders are not faceless banks, they are still investors who do not seek to lose money when people do not pay their loans.
Avoid payday lenders
There is a point of sale that should almost always be avoided: Payday loan providers. These lenders charge astronomical rates, sometimes as high as 400 percent, on short-term loans that average around two weeks, and often do not require credit verification at all. As bad as you need cash, be very careful not to fall into the endless cycle of the payday loan. We will cover payday loans in a future blog post, so stay tuned. But be careful about payday loan. Because you can be trapped with payday loan debt.
If you are looking for a loan in the market and have bad credit, you need to research to find both “private” options, friends and family, and newer online lenders that don’t just focus on credit scores. Then, compare different potential lenders, as the platforms will require different minimum credit scores, loan terms, and, most importantly, rates that can reduce your spending or debt reduction capacity.