Nobody wants to be in a bad credit situation. If you are in this situation or have been in this situation, you are not alone; it happens to the best of us. A poor credit status can be a result of poor financial management or just hardships in life. Loss of a job or an illness is among the issues that can land you in a bad credit situation.
Are there still loan options for you if you have a bad credit history? Yes, there are plenty of options for you. These loans will not be under the best of terms.
If you have a bad credit badge getting a loan may seem an act in vain. Thankfully, this is not the case. The bad news is that these loans are financially risky and may leave you in a worse situation than you were.
Read on to get a good understanding of what a bad credit loan is and how you can get one.
These are loans that are specifically designed for those with a low credit score or have no credit history. Unlike conventional loans, they carry a high-interest rate and greater restrictions. The punitive terms and higher interest rates are meant to cater to the high risk of default.
Bad credit loans are also commonly referred to as personal loans. They are usually for a fixed short term. In most cases, those who take them out rarely focus on the interest rate charged.
The fees charged and the terms of these loans vary from lender to lender. They can either be secured, i.e., backed by collateral or unsecured.
The FICO credit scoring system is the most used credit- scoring model. Under this model, the scores range from 300 to 850, with 850 being the highest possible score. A good credit score starts from 670 and goes up to 739. A score above 800 is considered exceptional.
A bad credit score increases the chances of your loan application being rejected by a lending institution. All is not lost when you get a bad credit score. There are long-term habits that, if you adopt, will improve your credit score. Paying your bills on time is the most recommended way of improving your credit score.
Bad credit loans always sound like a godsend opportunity until you read the fine details of the contract. To help you make a better and informed decision, we recommend that you first consider the following:
There are several types of bad credit loans:
Personal loans can either be secured or unsecured. Secured personal loans are backed with collateral, while unsecured loans lack collateral. If you have a bad credit history, you are more likely to get a secured loan than an unsecured loan.
Payday loans are short-term loans whose payment is usually due the next month. The amount of money involved is also relatively low. The total cost of borrowing involved is usually high.
This involves borrowing money from your acquaintances. They could be family members, friends, or colleagues. The rates also offered usually lower than those charged by banks and other lending institutions.
Student loans are tailored to meet your educational needs like tuition, accommodation, and reading materials. Many personal loan providers will not allow you to use the loan for educational purposes. If you have a bad credit history, you will need a sponsor to co-sign your application before you qualify.
Read more: Best Credit Cards for Students
The following are the advantages and disadvantages of taking out a bad credit loan.