A low credit rating or significant amount of debt does not mean you are a bad consumer; unfortunately, banks and lending institutions tend to have a different opinion. If you default on payments or have out of control debts, banks are likely to reject you should you apply for a loan, even when you are seeking to consolidate your debt.
Many families are finding themselves in a poor position to obtain financial services with good terms. The good news is that there are specialised loans or benefits designed to help people with bad credit get out of debt or assist unexpected expenses like car repair.
Another way to look at these loans is that you’re applying for a loan and have bad credit. Because of this classification the terms or the loan will not be as favourable as to someone with great credit.
The Basics of Bad Credit Loans
These types of loans, also known as second chance finance, were created to help people who have difficulties obtaining financing through traditional sources. This could be a result of low credit scores, low income, repayment history, or bankruptcy. The good news is that you can find lenders who are dedicated to helping people facing financial difficulties. Each creditor will have specified criteria, but eligibility is not nearly as strict as it is for other types of loans.
You can expect to pay higher interest rates since lenders view people with “bad credit” as a greater risk, but it may still be beneficial to utilise this resource to improve your financial situation. Not only can you use the money to pay off outstanding debts, but as you make regular payments, you will improve your credit worthiness. If you stay current with your repayment schedule, you will likely find it much easier to obtain a standard loan once the bad credit loan is repaid.
How they differ from Traditional Loans
When compared to a standard personal unsecured loan, bad credit loans have different requirements and are prepared in a different manner. Since you are seen as a “higher risk” borrower, some lenders may even require a guarantee (security) which typically means they will place a lien on your home or vehicle. Some lenders will accept other methods to guarantee the loan, but this will vary between creditors.
Once approved, you can expect a higher interest rate and fees, but don’t let this discourage you. Instead of only looking at the dollar and cents, consider the long term benefits it will have on your credit score despite the increase in monthly interest. One way to combat this is to pay off the loan quicker if allowed; this will reduce the amount of interest paid back.
What you need to Apply
During the application process, it is vital that you present yourself as someone who has changed their “bad” repayment behavior and is dedicated to improving your financial situation. In addition to the standard paperwork, it is wise to provide recommendations from other creditors demonstrating a regular, punctual payment history. This does not mean that you have to bring a record of your credit card payments, but correspondence from your utilities provider, mobile provider, or any other creditor to whom you make regular monthly payments will augment your case. If you rent your apartment or home, you can also include documentation from the property manager to help your cause.
You will also need to verify that you can repay the loan by presenting proof of your earnings. This type of documentation may include pay check stubs from your current employer or taxation statements for those who are self-employed. If you are trying to obtain a payday loan, consider itemizing your monthly payments in addition to your incoming cash to demonstrate that you can pay the installments.
Remember that you are not alone; many people are dealing with bad credit and facing the same difficulties. Unexpected expenses arise which cause you to fall behind with payments, but a bad credit loan can help you get through it. Consult with a financial counselor to see if a bad credit loan can help you improve your credit and get you back to financial stability.
Image by Stuart Miles