Getting a Loan With a Bad Credit Score
It isn’t always easy to get qualified for a loan if you have a low credit score, but it’s not impossible -- and if you feel confident in your ability to make your regular payments on time, then you may even be able to raise your credit score as you make your repayments. The most frustrating part about applying for a loan when you have a low score, however, is the fact that you’ll have to pay much higher interest rates than someone else -- someone with a good credit score -- would have to pay for the same exact loan. Even if your credit score increases throughout your repayment plan, you’ll probably still have to pay the same interest rates (unless you can reach a settlement with your creditor, which is a completely different process that we won’t get into on this page).
It might be easier to think about interest rates as a sort of reward/punishment system for handling your finances. Pay off your debts quickly and on time, and you’ll have low interest rates on future lines of credit. Consistently miss payments or not be able to make payments at all, and any future loans for which you’re qualified with come with steep interest rates. This isn’t really to punish you per say; the financial institution merely sees anyone with low credit scores as high-risk investments, and a higher interest rate is a preventative measure which allows the institution to receive as much of the repayment as possible (should the borrower again be unable to pay off his or her debts).
There are a few different types of loans available for those borrowers with low credit scores, and it’s important to understand the differences between them if you’re thinking about applying for one of these loans. Remember: the lenders offering these loans emphasize that they won’t pay much attention to your low score, if any attention is given to it at all; nevertheless, there are other strings attached. These lenders know that a borrower with a low credit score is a high-risk investment, and they’ll use other means to ensure that they get their money back.
With a secure loan, you’ll have to provide your lender with some sort of collateral (i.e., insurance) which the lender will legally possess if you fail to pay off the balance you owe. Borrowers often use their homes as collateral (this is commonly referred to as a “home equity loan”), but other valuable items such as cars or antiques may also be used as insurance. These loans tend to be pretty sizeable, but remember that you’re being required to put valuable and essential items on collateral. These items are still legally yours throughout the process, and you’re still allowed to use them -- but only if you keep making all of your payments.
An unsecured loan, by contrast, is a riskier option for lenders. With this type of loan, the borrower is only required to put down his or her signature, promising to repay the amount owed -- no other collateral, no items that could be taken away -- just a signature. If lenders feel comfortable offering this type of loan to borrowers with low credit scores, they often ask for a cosigner or guarantor who will vouch for the borrower and will promise to pay back the money if the primary borrower fails to do so. The amount of money offered in these loans tends to be smaller than the amounts offered in secured loans, but the interest rates tend to be just as high.
Credit Card Loans
Many credit card companies allow customers to take out cash advance loans, as long as the balance on the card hasn’t been maxed out already. The amount taken as a cash advance will appear on the monthly bill, just like a purchase would appear, and the interest rate will be the usual rate you pay with that card.
These loans are considered to be the most dangerous for borrowers, because they involve huge sums of money and exorbitant interest rates. You can take out a lot of money with these loans, but you’re required to pay it back quickly -- the payment period is often only a couple months, or even just a couple weeks. The most dangerous part about these loans is that the interest rates tend to be very high to begin with, and if the borrower is unable to pay back the full balance within the given time period, those interest rates can increase exponentially.