Getting loans has historically been a cumbersome process. Initially, financial institutions were only accessible by the upper middle class who had a spotless reputation and huge collateral to backup the loans. While the 20th century brought about mass adoption of banking services by the common public, getting a loan post-2008 world crisis is harder than ever. In fact, “Getting a loan with bad credit” is one of the top search terms on Google.
Seeing that not every one of us enjoys a spotless credit history, it’s understandable if you have a bad credit history. But that doesn’t mean you should be devoid of the relief of added liquidity. In this article, we will be looking at some of the ways you can get a bad credit loan. Before that, however, we need to understand how lenders determine the interest rates in the first place.
How Do Lenders Determine the Interest Rate on a Loan?
Every loan has a few risks associated with it that can be divided into two categories; systematic and unsystematic. Systematic risks are those associated with the entire market instead of a particular lender or borrower. A fall in interest rates can be classified as a systematic risk, as it affects the entire market. An unsystematic risk, on the other hand, is determined by evaluating the qualities of the specific borrower.
The basic principle is simple; the higher the risk, the costlier the loan. This is because lenders need an added incentive to fund a riskier loan due to the higher probability of default.
Of the two risks, we will only be focusing on the latter, as it’s something we can control. The major unsystematic risk that we are concerned with is the default risk i.e. the risk of a lender defaulting on the loan. This risk is determined through the credit history of the lender along with the collateral offered.
Your credit history includes all your past credit-based transactions; how successful you were in fulfilling your payments. It serves as a retrospective evaluation tool for creditors to judge your creditworthiness. But that’s not the only thing that determines your credit score. Co-signing a loan with someone who has failed to repay it will lower your score, along with current outstanding debts.
Secure vs. Unsecured Loans
A secured loan is one which is backed by some sort of collateral. Car loans are examples of such loans, as the loan can be redeemed by selling the car. An unsecured loan is one which is backed by no collateral. A secured loan is less risky than an unsecured loan, so putting up collateral will also affect the interest rate you’ll be offered.
Bad Credit vs. No Credit
Many people tend to confuse bad credit history for no credit history. Bad credit comes as a result of delayed payments, failed loan applications and overarching debt. No credit refers to the situation where you don’t have any past credit history. While no credit loans have a higher interest rate as compared to general loans, a bad credit loan can be much more restrictive than a no credit loan. However, there are a few ways you can improve your credit score.
How to Improve Credit Score?
Checking your Credit Report for Inconsistencies
Credit scores are calculated using past payment records along with numerous projected variables. This leaves a significant margin for error and it’s entirely possible that the report might have missed something that could contribute towards a higher credit score, such as the full payment of an account payable.
Getting a Co-signer
A co-signer is someone who can vouch for your creditworthiness. Getting a co-signer with a respectable credit history will not really affect your credit score. However, it will help you get lower interest rates on loans as your default risk is lowered.
While this may seem counterproductive, spending more can actually help your credit score if you make all your payments on time. Many debtors deliberately make credit based purchases to improve their credit scores.
Scheduling an Interview
If you are constantly being rejected for loans, it might be a good idea to schedule an interview with your loan officer. You could be approved for a loan if you display that you are sufficiently responsible and will return the amount on time. Make sure to bring the following things to an interview:
- Filed tax returns
- List of current outstanding debts
- Past credit records
- Salary slip
Loan Options for People with Bad Credit
Credit unions are relatively small financial institutions that give out low interest loans. The loans generally have an APR of 5-9%, but getting a loan can prove to be very difficult as membership is usually required. The union might also require you to contribute a certain amount in processing costs and paperwork.
Bad Credit Loans
Bad credit loans are designed specifically for people with a bad credit rating. They can be availed at numerous financial institutions, including banks. While it’s easy to qualify for a bad credit loan, the interest rate on a bad credit loan can be quite high. The repayment terms may also be unfavorable, with numerous modifications such as adjustable rates that charge a fixed interest rate in the first few months, after which a higher interest rate is charged.
Payday loans are generally seen as a last resort for people who don’t get approved for loans. This is because similar to bad credit loans, payday loans also charge a higher interest rate than conventional loans. However, there are several unseen advantages as well. For instance, payday loans are ideal for emergency situations where an immediate cash advance is required. This is because payday loans are processed faster due to no credit checking criteria.
There are numerous services such as Quiddi Compare that link lenders with borrowers online, making it very convenient to find a loan with low interest payments. If you are looking for a bad credit loan, make sure to browse through their catalogue.