Direct Lending Solutions: Tips for Coping with Bad Credit
In certain areas of your adult life, you will need to take out a loan – to buy that car to get to work, to get that mortgage to own a home, or maybe to host a beautiful and festive wedding. Whatever your reasons, obtaining a loan will help you finance those larger purchases.
What is an Unsecured Loan?
Unsecured loans occur when a creditor lends you money and does not have a security interest in anything that you own. Credit cards are unsecured loans unless you have a card that is secured through your bank account with a credit line limited to the funds in that account. Personal loans are usually unsecured, and the terms of the loan are determined by your creditworthiness. For example, if you have bad credit (below 550), your interest rate may be very high.
For those who have an excellent credit score, obtaining such financing is not a difficult process; being a low credit risk means that many lenders will be more than happy to work with you to get the amount and terms that are agreeable to both of you.
The problem arises for those who do not have a great credit score. If you are one of those people, you may think that you are not able to secure a loan at all, but that’s not necessarily true. You can still get a loan with bad credit.
A bad credit loan is a special type of lending arrangement for those whose credit score is less than stellar. There are lenders who are willing to work with you to secure a loan, with no credit check, when others would reject you based on your credit score alone.
These lenders will look at other factors outside of your credit score to determine your creditworthiness, or your ability to pay back a loan. Assuming you agree and comply with the terms of the loan, then you can still make that purchase and have the chance to improve your credit score at the same time.
What is considered bad credit?
You can take a look at your credit report to find out. For example, if you have missed or late credit card payments, have an inconsistent employment record, or have declared bankruptcy – all of which will be listed on your credit report – then you most likely have bad credit. Even if you are on the road to financial recovery, it will take a while before your credit report and score will change for the better. However, by obtaining a bad credit loan and paying it back promptly and in full, you can gradually yet consistently make those positive changes that you need.
Having “No Credit” vs. “Bad Credit”
There are considerable differences between having bad credit and the mere lack of an established credit history. Many young people who are just starting out, for example, may not yet have a sufficient credit profile, and this is not the same as earning a lengthy, bad-credit rating resulting from unfortunate circumstances that too many of us face in our lives, or worse — bad decisions, poor debt management, late payments, collections, and excessive spending accounts. Your credit is scored by each credit bureau based on your percieved financial habits and how well you manage credit.
Tip: Credit scores are designed to move quickly in either direction. Good credit can be erased in a matter of months, and bad credit doesn’t have to define you any longer than you allow it to. Start making improvements now. Make timely payments, keep your spending under control, and try to bring your credit untilization down as much as possible. The ideal credit balance is about 30%.
Lenders typically look at more than just your credit rating. For example, a lender will usually take into consideration additional factors, such as a recent promotion, improving financial outlook, or a solid upward trend in your credit score indicating to them that you might be on much better footing. Theoretically, a person with a newly established credit history, a college student for example, can have a great credit rating on paper — calculated using very limited information from just one or two accounts listed on in their credit history, but that doesn’t make them a good credit risk and lenders know it.
Range of FICO Scores (Table)
|Fico Score||Rating||% Pop||What to Expect|
|300-575||Poor||18%||In this range, a credit applicant may experience difficulty obtaining credit approval. Very high interest rates may be imposed and collateral may be required.|
|576-675||Fair||20%||Better chances for approval, but rates may be high.|
|676-730||Good||23%||In the 50th percentile, applicants of this range are likely to get approved for a mortgage or unsecured credit at competitive rates.|
|731-799||Very Good||20%||Very good approval odds.|
|800-850||Excellent||19%||Lenders may be offering you credit before you even ask!|
% Pop = Percent of population
Sources: Experian.com and Equifax.com
Do you qualify for an unsecured loan?
After all, not every lender is willing to accept you as a risk, depending on your credit score and report. Firstly, you need to locate those lenders who are willing to extend bad credit loans. Next, as with any loan, you need to meet the lender’s qualifications. While every lender will have different qualifications, it is likely that you will be expected to have a consistent, monthly income at a stable place of employment. You will also need to provide proof of a permanent residence, whether it be renting or owning.
Additionally, you will probably need to indicate that you are current with any other debts, such as your credit cards. Keep in mind, lenders will still review your credit score and report to understand any trends in your finances; if you have been working on improving them, then lenders will see that and view you more favorably as a relatively worthy risk for a bad credit loan.
Though the basic principle of a bad credit loan is the same as others – you receive a large sum of money that you pay back, with interest, every month, until the amount is paid back in full -bad credit loans do have their differences. For example, the interest rate you receive will likely be higher, possibly much higher, than it would be for someone with a better credit score. Next, the loan will probably be secured rather than unsecured. This means that you will need to offer some type of collateral, such as a car, that can be held by the lender until you pay the loan in full. If you default at any time, even with the last payment, then the lender can confiscate that item. Finally, you will have less negotiating room, if any at all, when discussing the terms of the loan.
Although having bad credit now may seem bleak for your future, it doesn’t have to be. By making small, continued, and positive changes in your finances, you can still obtain a loan even with bad credit, and work your way towards being a great credit risk.
People who are coping with bad credit know how difficult and frustrating it can be to get a “yes” from a lender. Moreover, the constant rejection can be humiliating and degrading for subprime borrowers. Before you decide on the type of loan that you’d like to apply for online, it’s crucial that you get the facts and research your borrowing options so you can make the best financial decision possible. When shopping for a direct loan, you’ll discover quite a plethora, each with varying terms, conditions and interest rates. These factors will cumulatively determine your total expense during the life of the loan.
By definition, a loan is considered to be “unsecured” when it is not backed by personal property as collateral; rather, it is extended to you by the lender with just your signature on a promissory note to repay the money according to specific terms, rates, and a payment schedule.
Keep in mind, when you need a loan quickly, cash advances and payday loans are certainly convenient and easy to qualify for, but we caution that these loans come at a high cost, with governing laws that vary from state to state. Although they do serve a valid purpose, they should be used sparingly or for emergencies.
The small, short-term loans like the ones we’ve just described, typically range from $100 to $5,000. Larger personal loans may require better credit scores and a proven ability to repay, such as verifiable employment and adequate income. Loan amounts above $10,000 will inevitably require “good” credit.
Your Credit Rights
The Credit Financial Protection Bureau (CFPB) has established consumer protection guidelines that affect your rights to credit report access, disputes, and overall account accuracy.
- Access: You now have free access to your credit scores through your credit card company. The scores from each credit bureau will be printed on your monthly statement. These will also be available in your personal account on the company’s website. Additionally, if you dispute any information on your credit report, you are entitled to a second free copy from each agency. This will help ensure that the changes, if any, have been made on your report.
- Disputes: For credit disputes, each credit bureau must have trained staff available to examine all documentation provided by both the consumer and the lender. Their job will be to make a reasoned judgment that considers both sides of the story instead of accepting only the lender’s version of events (a frustrating aspect of the dispute process in the past).
- Medical Debt: Each agency must wait 180 days before adding medical debt to your credit report. Furthermore, they must remove all medical debt from your report when the insurance company pays it off.
Beware of Loan Scams
Protect yourself and your finances from fake lenders and low-life scammers. Make sure to read up on scam techniques, such as their use of legitimate company names and logos, stolen from real loan companies, in order to hide their illegal operation. Educate yourself about foreclosure fraud, advance fee loan scams, and identity theft, so you’ll be better able to recognize red flags when you see them. You will be able to fend off the bad guys who take advantage of the desperate and vulnerable.