Borrowing money with no credit or poor credit can be challenging. A poor credit score or no credit limits your lending options and the amount of money you can borrow. If you run into financial difficulties, you may need to explore alternative options to obtain funds to cover your financial needs.
Fortunately, having bad credit doesn’t have to leave you without access to a personal loan in case of an emergency or consolidating your debt. While you may need to put in some effort, you can find a lending option despite poor or no credit.
What Do Lenders Consider Poor Credit?
Your FICO score is a credit score that reflects your reliability as a borrower in the eyes of lenders. Banks use your credit score in conjunction with information on your credit report to determine whether they will give you a loan and at what interest rate.
With credit scores ranging from 300 to 850, a score under 600 is undesirable for most lenders. Banks will avoid giving you a loan if you do not pass this threshold, but some institutions market to people with lower scores. This practice presents an ethical issue as people with lower FICO scores pay higher interest rates.
Most people think that consumers with lower credit scores have higher default rates. However, the statistics show that this is a misconception since people across all credit scores exhibit similar default rates.
Other Factors That Affect Loan Approval
While your credit score is vital in securing a loan, lenders weigh other factors in their decision. Putting effort into improving these criteria can improve your chances of getting the loan you need.
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Payment history
Meeting your obligations as a borrower consistently builds your payment history. Making late payments or missing payments negatively affects your credit score and signals to banks that you might be a lending risk.
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Credit usage
Your credit utilization rate affects your ability to borrow money. Credit utilization is expressed as a percentage reflecting your used and unused credit ratio. Generally, you need to keep credit usage below 30% for lenders to consider loaning you additional funds.
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Length of credit history
After about seven years, most items that drag your credit score down tend to fall off your report. Maintaining a reliable profile as a creditor for seven years may not always guarantee a bump in your credit score, but it is a good general rule. Banks also weigh the length of your credit history in their lending decisions.
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New credit
If you repeatedly apply for a credit card or constantly seek out new credit, it will reflect negatively on your report. New credit takes on a weight of 10%.
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Credit mix
Lenders examine all the types of credit you have, including your mortgage, car loan, student loan, and credit cards. Exhibiting poor payment practices on any of your credit damages your score. Credit mix criterion accounts for 10% of the lender’s decision.
How Does a Bad Credit Score Affect Lending?
The risk-reward tradeoff is a principle that financial institutions value highly. This fundamental market driver emphasizes that taking a higher risk should pay the risk-taker a higher return.
Banks must assess you as a possible risk when you seek to borrow money. If you carry a significant risk of not paying your loan back as a borrower, the bank will charge a higher interest. Therefore, a bad credit score tells a lender that they should charge you higher interest.
While credit scores may not be a definitive indicator of whether you will end up defaulting, they indicate credit behavior by age group.
Young adults between the ages of 20-29 have the worst credit scores, with an average of 662. The 30-39 age group follows with 673, and people between 40-49 have an average score of 684. As you move up the age demographic, you find that people aged 50-59 have a 706 score while those over 60 have the highest score at 749.
The difference between the highest and lowest credit scores is enough to add thousands of dollars in total interest to your loan. Taking this into account early on in life can help you work on creating a good credit score so you can enjoy more affordable loans when the need arises.
What is a Bad Credit Loan?
Not everyone will have a stellar credit score to secure fast approval with the lowest interest rates on the market. Consumers with bad credit scores also seek to borrow money, and lenders design special agreements for this group. Bad credit loans typically carry higher interest rates and can come with restrictions that act as protections that cover the risk of default.
How to Choose a Lender for Poor or No Credit Loans?
Before starting the loan application process, you need to take the time to compare all bad credit lenders available to you. Failing to do so can add thousands of dollars in repayment, making it harder to meet your obligations and further reducing your credit score.
Start by weeding out the loans you have no chance of securing. Eligibility requires a minimum credit score and possibly a favorable debt-to-income ratio. Find out each lender’s requirements and eliminate those that ask for a borrower profile currently out of your reach.
Next, find out what the repayment terms are for each loan. Bad credit loans allow some flexibility in their repayment window so you can arrive at a monthly payment that is best for your finances. Do this before signing to avoid entering into an agreement you won’t be able to honor. Interest rates will play a crucial part in your decision, but you must not base your decision on this single factor.
Besides the numbers and percentages, finding a lender you can feel comfortable approaching if you experience unexpected financial difficulty is critical. The type of human interaction you maintain with the lender can outweigh the benefits of an online bank where AI bots and random bank representatives handle your inquiries.
Loan Options for Poor Credit
You can receive bad credit loans from a wide range of lenders, some more viable for your finances than others.
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A loan from family or friends
Finding a family member or a friend willing to lend you the funds you need is the best option for people looking to secure low-interest rates and flexible repayment terms. You may be able to secure a loan without interest, depending on the loan amount and your relationship with the person.
Receiving a loan from a relative or friend may prove a hassle-free experience as people close to you will likely empathize with your problem. However, getting a loan from relatives or close friends is risky because failing to pay them back can damage loving relationships and drive people apart.
To avoid the fallout and breach of trust that comes with a failed lender-borrower relationship, treat the family or friend making the loan as if they were a bank.
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Credit unions
Credit unions are non-profit money cooperatives that offer their members low-interest loans. Funds for lending come from member deposits that enjoy higher savings rates while borrowers pay lower fees than bank loans.
To join a credit union, you need to have a point of reference that connects you to its members. Companies, labor unions, and other organizations may have credit unions you can access. To become a member, you will have to be part of a specific community or have a close relative who is a member.
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Borrowing against your home
Having equity in your home allows you to apply for a loan or a home equity line of credit. You can receive a loan with your home as collateral despite poor credit. A major advantage this type of loan has is that the interest you pay is tax-deductible in most cases.
On the flip side, while securing the loan will be easier, defaulting on it will cost you your home. When borrowing against your home, seek the most reputable lender and have a backup plan for dealing with unexpected financial difficulties that may emerge.
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Peer-to-peer loans
Peer-to-peer lending appeared in 2005 but gained popularity during the 2008 financial crisis. P2P lending, as it’s known, is an online platform that brings individual lenders and borrowers together. In this online space, the two parties can come to a loan agreement without the intermediation of a financial institution.
While P2P lending takes credit scores into account, the lender has a greater say in how their funds will be used. P2P platforms evaluate risk and help verify the identity and credentials of lenders and borrowers.
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Online loans
Online lenders are banks that operate exclusively online. By eliminating brick-and-mortar branches, online lenders offer fast service and, in some cases, better interest rates than other borrowing options.
After applying for a personal loan and receiving approval, your funds can appear in your bank account within hours or on the next business day. Online loan platforms are easy to use and give credit scores lower importance than other lending institutions.
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Cash advances
A cash advance is a way of borrowing from your credit card. Cash advances should be reserved for cases where you need cash in the short-term and are confident in your ability to repay the amount as soon as possible. This option may seem attractive to borrowers with bad credit but try to avoid them as cash advances carry high-interest charges.
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Payday loans
Payday loans are short-term loans where the issuer extends high-interest credit to individuals based on their income. Lenders in this field don’t consider your credit score, while failure to repay the loan on time damages your score.
This lending vehicle involves high risk as people who resort to payday loans often roll them over into new, more costly ones to avoid default. The ethics of this rollover process find payday lenders walking a tightrope of legality with their advertiser disclosure.
Other Factors to Consider
Besides finding the right type of loan, there are choices you can make to convince the lender that you qualify for a loan from their establishment.
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Find a co-signer
Getting a co-signer can help your chances of securing a bad credit loan. A co-signer with good credit will guarantee that the terms of your loan match their credit score while you both share responsibility for repaying the loan.
The payment information pertaining to the loan is recorded on both parties’ credit reports, and the consequences of one party refusing to do their part will affect both parties equally. Just as receiving a loan from a relative or a friend, timely payments will ensure you don’t damage your relationship with the co-signer.
Furthermore, irresponsible payment behavior on your part can negatively affect another person’s finances. That’s why deciding on sharing your burden with a co-signer should come after careful consideration.
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Secured vs. unsecured loans
Putting something on the line can convince a bank to extend a loan offer more willingly when you have bad credit. One of the things you can do is apply for a secured loan. A secure loan lets you borrow money against an asset such as your savings, stock portfolio, property, car, or even a boat. The bank holds your item as collateral to ensure that you don’t default on your obligation.
The security this arrangement provides the lender allows them to offer a lower interest rate and better terms. On the other hand, unsecured loans are more challenging to obtain for consumers with bad credit. These loans are not connected to any of your assets, making the lender offer higher interest rates to balance the risk they are taking.
Make an Informed Choice
Making the best choice for a loan with poor credit is a balancing act with many moving parts. The experts at Finance is us can help you increase your chances of personal loan approval. Learn how a personal loan can affect your credit score and how to do your due diligence to avoid potential pitfalls.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.
