Borrowing when you have a bad repayment history is too expensive. Depending on the loan type, the interest rate offered to a person with a low score can be more than double what a healthy-credit borrower is charged. That doesn’t mean these sky-high fees are a fixed fact of life. This guide will equip you with tips and tricks for navigating the high-interest rates that bad credit loans charge.
Obtain Your Most Current Score
Don’t just suspect you have a low score. Instead, request a report from a scoring bureau so that you can know precisely how bad it is. FICO, a leading scoring agency, groups credit score into five categories:
Excellent: 800-850; Very good: 740-799 ; Good: 670-739; Fair: 580-669; Bad: 300-579
It’s always advisable to have a good grasp of your financial history before applying for any loan. You can still borrow money even if you don’t have an excellent score, but as this magical number drops from very good to bad, you will notice a big difference in the rates and terms creditors are willing to offer you.
Shop Around for the Ideal Offer
Every offer is unique. Different lenders may give you reasonable terms on your loan, so it is imperative to contact several lenders to see who will give you the ideal rate and terms. If you have a poor rating, don’t give up if one creditor turns you down. Instead, apply to multiple creditors and you will definitely get an offer.
Look Beyond Traditional Lending Institutions
If your score is poor, you can still raise some money by looking beyond your bank for a loan. There are many online lending platforms that are willing to work with people who have low FICO ratings. These online sites allow you to do a side by side comparison of offers from different creditors. Online lending options have greater flexibility than credit unions and banks. According to realisticloans.com, they put less emphasis on creditworthiness and more weight on your capability to repay. If you can prove that you have adequate revenue from your business, assets, or job to pay back the borrowed amount on time, then you can obtain a loan with reasonable terms.
Borrow from a Credit Union
Unions are a good source of bad credit loans. They are member-owned and tend to concentrate on addressing member needs, meaning they have more flexibility compared to banks when it comes to making lending decisions. It also means applicants have access to opportunities that traditional lenders would decline to consider. What’s more, these unions have a not-for-profit status that excludes them from tax payment and are highly likely to accept riskier borrowers compared to banks. Their products also come with lower interest charges than those from banks.
Consider Person-to-Person (P2P) loans
These types of financial products are a subcategory of personal loans. Rather than seeking funds from a union or bank, you can try raising money from other people. These people could be relatives, friends, or even total strangers who are ready to lend via P2P platforms. P2P lenders may approve applications from borrowers with a low score or an irregular salary. They may also leverage alternative methods to assess your creditworthiness. For instance, they may use your reliability in paying bills like rent as an indication of creditworthiness.
If you decide to borrow from friends and relatives, write down everything to ensure there will be no surprises. Consider securing big loans like auto financing with a lien. Such moves will go a long way in protecting your relationships with your “lender.”
Partner Up with a Guarantor
If you can get someone with a great profile and a good income to help your application get approved, then it will be worthwhile to buy that home now rather than wait until your score improves. A guarantor will give a lender an additional layer of security in case you get late on a payment or you default altogether. Creditors may be willing to charge you a lower rate when there is a cosigner involved. If you are planning to partner up with a guarantor, ensure that the person is fully aware of the risks involved and that you appreciate how selfless it is for someone to guarantee you.
Consider Borrowing against Your Home
If you are a homeowner and have sufficient equity in the home, consider taking advantage of the equity to borrow money. Creditors won’t base the decision to give you a home equity financing on your poor financial history. Home equity mortgages come with a set interest rate and set repayment period. You can repay the borrowed amount for up to three decades. The interest can be exempted from tax if you list it on your taxes and utilize the cash to cover major repairs in your home.
The main downside of this type of financing is that you can end up losing your home. If you frequently miss out on payments, your creditor can legally take your home, sell it, and use the proceeds to cover the balance. Moreover, you usually part with closing fees to secure this product, and you require sufficient home equity to be eligible. If you choose to borrow through this option, be sure to do thorough research and compare offers from several lenders.
You may not have adequate income to be eligible for a loan, but do you have a car, house, expensive watch, or any other valuable asset? Such assets can serve as collateral when you are borrowing. Check with banks and unions. Consider storefront financing when you have exhausted all your options. Traditional banks and unions may accept saving accounts and other types of financial accounts as collateral.
Getting around high-interest rates associated with bad credit loans can be difficult, but it’s still doable. You just need to be smart and know how to look for the best offers. Use the above eight tips to minimize the cost of your borrowing the next time you are applying for a loan and your financial report isn’t that good.