If you have bad credit this can have a very negative affect on your life. We’ve become a credit-centric society. If you want to buy an automobile, a house or even a dishwasher you need to either have “good” credit or be prepared to pay cash. Many landlords will check your credit score before renting to you, as will most automobile insurance companies before selling you a policy.
What is bad credit?
Bad credit personal loans are based solely on your credit score. It’s that little, three-digit number that prospective lenders use to determine whether or not to grant you credit and at what interest rate. Most lenders relay on what’s called your FICO score. The tend to view scores in ranges as follows:
- Very good or excellent credit score – between 700 and 850
- Good credit score – between 680 and 699
- Average or OK score – between 620 and 679
- Low credit score – between 580 and 619
- Poor credit score – between 500 and 579
- Bad credit score – between 300 and 499
How is your credit score computed?
Your FICO score is a mathematical representation of five components. They are your credit usage or how well you’ve handled credit, your credit utilization, credit history, the types of credit you’ve used and recent credit searches. Of these five, the two most important are your credit history and credit utilization as they make up approximately 65% of your credit score. If you have a score of 500 or lower you can just about bet it’s because you have mishandled your credit in the past and/or have just run up too much debt.
As you can see from the score ranges shown above if you have a credit score lower than 500, you would be considered as having bad credit and if you were to need a loan you would have to get one of those bad credit personal loans.
Where to go for a bad credit personal loan?
If you have a bad credit score and a bad credit history, it can be very difficult to get a loan because lenders will view you as a bad risk – that you might end up defaulting and leaving them in the lurch for whatever amount of money they loaned you. But before you go to a subprime lender, there are at least five options available for bad credit personal loans.
Try a credit union
If you’re not familiar with credit unions they are like banks except they are literally owned by their members who typically have something in common such as working for a large corporation or belonging to a union. They are nonprofits and are usually able to offer better interest rates and more services than the typical bank. Also, they tend to be more people oriented and might be willing to work with you even if you have poor or bad credit – if you were able to successfully convince them that you’ve turned things around and are better prepared to repay a loan.
If you own your home
If you own your home you might be able to get a home equity loan or a homeowner’s equity line of credit (HELOC). One of these loans could be easier to get because you would be lowering the lender’s risk by using your house as collateral. If you’re not familiar with these types of loans, they’re basically the same except with a HELOC you’re given a checkbook or debit card and can then use the money, as you need it. In comparison, you receive the proceeds from a home equity loan all at once.
Of course, these loans put the risk on you as if you were to default, the lender could foreclose on the house and leave you homeless.
Borrow from family members or friends
We understand that it would be no fun and a little embarrassing to go to a friend or family member and ask for a loan but it’s still a viable option. In the event you do this, make sure you treat it as a regular business transaction and that you document and legally record it. This document should include the interest rate you will pay on the loan, its terms, any collateral that you will put up for the loan and what will happen if you fail to repay it. The bottom line here is that a loan from a friend or family member must benefit everybody and should actually be a last resort. You don’t want to risk losing a close friend or alienating a family member over a misunderstanding about money or a bad debt.
Try for a co-signer
If you can’t find a friend or family member willing to loan you money, try for a co-signer. This should be someone with good credit that will co-sign a loan with you. Just keep in mind that if you don’t repay the debt, your cosigner will be on the hook for full payment. In addition, this will be recorded on both your credit reports, which would be devastating to your co-signer.
Check into peer-to-peer bad credit personal loans
This type of lending is where the funds come not from a bank or some other financial institution but from a person or group of people. The way it works is that you post the amount you need and why you want it. Peer-to-peer lenders such as The Lending Club will screen you and check your credit, which will become part of your loan listing. Your credit score will still be a factor but some individual investor might be more sympathetic to your situation than a traditional bank or credit union. Or he might be willing to gamble on you in return for an interest rate of 25%, 29% or even higher.
A final alternative is to forget about the bad credit personal loans and go instead to a debt settlement company such as National Debt Relief. Most of them are able to settle your debts for around $.50 on the dollar and then provide you with a two- to four-year repayment plan– depending on the size of your debt. This would definitely ding your credit score but not as seriously as a bankruptcy and would, in effect, give you a fresh start with no more bad debts.