Let us start with the good news first: It is possible to get a loan with bad credit. Now the bad news: It is not easy to find a loan with bad credit, and cost of bad-credit loans is high. This article describes bad credit, how to get and where where to find bad-credit loans, and alternatives to bad-credit loans.
What is Bad Credit?
Credit scores range from 300 to 850 for the often-used FICO credit score, and 501 to 990 for VantageScore. Generally speaking, a person is considered a “prime” borrower when his or her FICO score is 680 or above, or an “A” borrower with a 900+ VantageScore.
However, the 680 FICO threshold just mentioned is not a hard-and-fast rule. A hypothetical lender’s underwriting department may make a rule stating, “We will offer low-interest loans to people with 800+ FICO scores, high-interest loans to people with 750-799 scores, and reject all borrowers who have less than 750 FICO scores.” For more than one reason, a 680+ FICO or 900+ VantageScore will not guarantee qualifying for a loan.
Generally speaking, people with credit scores of 640-679 are caught in a FICO score no-man’s land where some lenders will reject these borrowers outright, and others may approve loans if the borrower has unusual circumstances, or brings a co-signer to the table. Most lenders seem to agree a score below 580 is sub-prime.
How do you find loan with bad credit? Let us look at your options.
|Bad-Credit Loan Options Compared|
|Peer to Peer||Wide-ranging interest rates. Borrow $2,000 – $25,000||Loans for people with almost any credit history. 12-60-month terms.||Higher interest rate than secured loans.|
|Home Refinance||Not available from legitimate lenders if your credit score is too low.||Low interest rate. Long term creates low monthly payment.||Burdens home with debt.|
|Vehicle Refinance||Must own significant equity in vehicle or own it outright. Not available if credit score is too low.||Low interest rate.||Can result in vehicle repossession if you default.|
|Co-Signer||Find friend or family member to co-sign personal or other loan.||Ride on coattails of co-signer’s (presumably) higher credit score.||Creates liability for co-signer if you default on loan payments.|
|Factoring||For 1099 workers, sell accounts receivable to third-party at a 15%-30% discount.||Factor assumes risk of collecting payment from debtor. No minimum credit score.||Steep cost.|
|Local Bank or Credit Union||Personal relationship with lender that may make lending decision on character instead of credit score.||History with lender may make loan possible.||Depends on creating long-term relationship with lender.|
how to get a loan with bad credit
vantagescore and fico scores are meant to be predictive statistics. the idea behind a credit score is, the higher a person’s score, the higher the probability the person will repay a loan. if you have a bad credit score, you face an uphill struggle. qualifying for a loan when you have a bad credit score is not an easy task, but is possible, as suggested in the table above. let us look at each of your options.
a peer-to-peer loan is a loan between people accomplished by people who meet on a web site such as prosper or lending club. potential borrowers apply at prosper or lending club and enter the information one would expect to place on a loan application. borrowers also include a statement describing the purpose for the funds. both prosper and lending club set the interest rates according to an applicant’s credit score. lower scores result in higher interest rates, generally speaking.
before the mortgage meltdown in 2008, it was relatively easy to dip into your home’s equity to accomplish a cash-out refinance or home equity loan. however, the pendulum has swung the other way, and mortgage lenders now require 680 or higher fico scores to accept a refinance or home equity loan. homeowners can still find low-credit refinances, but these are from “hard-money” lenders who charge very high interest rates. if your credit score is in the prime/not-prime no-man?s land we described above, then there is little harm in applying for a mortgage refinance.
cash-out vehicle refinances are available from a national lender, wells fargo, and local mom-and-pop finance companies. one important consideration about vehicle refinances: miss a payment and you risk a repossession. vehicle refinancing is a low-cost choice with a big potential downside.
if you know a friend or family member with a high credit score and relatively low debts, a co-signer is a great way to qualify for a personal loan. the downside to co-signing is risk to the co-signer. if you default, you put the liability for repaying the loan squarely on the co-signer’s shoulders. this can strain or end a relationship, and burden a person who did not expect to pay the loan.
if you are a contract worker, such as a real estate agent or contractor, then consider factoring instead of a loan. a “factor” is a person who buys the right to collect accounts receivable. the upside is you receive payment immediately and do not need to wait for your clients to pay their bills. also, the factor assumes the risk of collecting the receivables. factoring is expensive, however, and can cost 15% to 30% of the total amount due.
local bank or credit union
never underestimate the power of a long-time personal relationship. if you have a long-time relationship with a bank or credit union, you may be able to qualify for a character-based loan. a character-based loan is not based on your credit score or finances, but on your past behavior and relationship to the lender. if, for example, you repaid 10 previous loans to your local credit union on time, it is likely the credit union will approve your 11th loan request without hesitation.
bad-credit loans to avoid
avoid any online lender who requires you to pay an application fee or the first-month’s payment before funding your loan. here are five signs of a loan scam:
- lender is based outside of the us
- you must pay a fee in advance using western union, moneygram, or a cashier’s check
- the lender is neither a well-known national bank nor a local lender
- the approval process is instantaneous
- interest rate is too good to be true
the last point is key: any loan that seems too good to be true probably is.
alternatives to getting a loan with bad credit
your best bad-credit loan may be no loan at all. if you face distressing credit card bills, medical debts, or other personal loans, then a loan to pay off those other loans may be just pushing your problem down the road. you may need a more permanent solution, such as credit counseling, debt settlement, or bankruptcy. the advantages of credit counseling and debt settlement is neither require you to have any credit score at all!
use the bills.com debt coach tool to get a no-cost, no-nonsense, online assessment of your debt resolution options. enter your debts into the debt coach tool, and see the costs and qualifications for each option.