It can be hard for people with bad credit to find loans. So many lenders advertise great interest rates … for people with “excellent credit.” But if you have poor credit (generally considered the mid-600s or below), you can expect to be hit with an exponentially higher interest rate.
Many loan companies look at your credit score but also look at your debt-to-income ratio in order to ascertain how likely you are to repay your loans.
It’s worth looking into what credit score range your prospective lender utilizes. The score ranges for Vantage, FICO, and FICO industry-specific scores are all a bit different. While a score like 580 might place you in the “poor” category with one, you could fall into the “fair” category in another. Also, mistakes can easily appear on your credit report, such as closed accounts listed as open, paid accounts listed as late, or getting listed as an account owner when you are only an authorized user. In these instances, you can submit a complaint and get your report fixed, which could gain you the precious few points to get you into a better score range.
Personal loans can be acquired from banks, online lenders, or credit unions and generally are paid off in monthly payments over 12 months. Personal loans often offer better interest rates than credit cards (depending on credit scores) and are generally unsecured loans (no collateral required). Personal loans can be good for consolidating debt, especially if it is debt on credit cards with a high APR. If you’re eligible for a personal loan with a lower APR, you could save some serious money. A perk of personal loans from some online providers is that you can apply easily online, get a decision and a loan offer quickly, and receive a loan fast. With Helix, if a loan agreement is signed by 5:00 pm Central Time, funds will be available by the following business day.
While a bad credit personal loan might not have the best interest rate, you can get a better one if someone with good credit co-signs on your loan. Another option is to try for a secured loan, in which the creditor requires collateral to ensure you’ll pay back the loan. Loan companies often offer better interest rates for secured loans. Although this can mean a wider array of loans to choose from, be aware it could also mean losing your home if you had put it up as collateral.
Installment loans are a type of loan that is paid off in weekly, biweekly, semi-monthly, or monthly increments. They are amortized loans, meaning a portion of each payment goes toward the accrued interest, as well as toward the principal or the initial borrowed amount. Auto loans, mortgages, and personal loans are all examples of installment loans. Often, lenders will run a soft credit check to assess a potential borrower and establish what APR to offer. Soft credit checks shouldn’t impact a credit score. Sometimes, lenders will run a hard inquiry, which can affect credit score if several have been ran recently. Helix utilizes Clarity Services, an alternative credit bureau owned by Experian.
The benefits of installment loans? The smaller payments over a longer period of time are easier to pay off than loans that last mere weeks and still rack up plenty of interest. And, most importantly, some lenders report your successful payments to credit bureaus, showing them that you can make consistent payments and in turn raising your credit score. Helix reports payment performance approximately 60 – 90 days after the final payment on the loan has been made.
Payday loans are a well-known type of loan for people with bad credit. They are essentially an advance on your paycheck — a way of getting paid before pay day. They are often small loans, paid back within two weeks, with the borrowed amount and a flat-fee interest payment in one lump sum. Because the interest is a flat rate, there is no benefit to paying the debt off early. In addition, payday loan companies generally don’t let credit bureaus know you’ve successfully taken on debt and paid it off, meaning these loans do you no good when it comes to your credit score.
Many payday loan companies don’t run any sort of credit check and instead require you to postdate a check or sign an agreement allowing them to automatically withdraw the funds from your account when the due date arrives. While the lack of credit check can be appealing to people with bad credit, they frequently have trouble repaying the loan in such a short amount of time. Therefore, it’s easy to fall into a cycle of debt that can be hard to recover from.
These loans often come with extremely high interest rates, and it can be hard for borrowers to scrape together the large interest payment and repay their borrowed principal in such a small amount of time. If a borrower is unable to pay, they can either take out another payday loan or “rollover” their loan, getting an extension in exchange for paying yet more interest—an expensive option either way. That’s why payday loans are often considered risky short-term emergency loan solutions.
Title loans are similar to payday loans in that they are short-term loans for bad credit. The difference is the title—car title, that is. Title loans require collateral to ensure the loan will be repaid, and that collateral is frequently in the form of a car title. In exchange for offering up a vehicle title, a borrower is able to take out a larger loan. However, they must own their car outright. You can’t take out a title loan with a car you’re still paying off. In addition, the resale value of the car may not affect the loan you’re approved for.
While the interest rates on title loans are a little better than payday loans, they can still be very high. Plus, if you miss payments, the lender can repossess the car and sell it to cover their costs. According to the Consumer Financial Protection Bureau, one in five cars are repossessed, and borrowers trapped in debt for seven months or more make up two-thirds of title loan business. Clearly, what’s intended to be a short-term solution frequently becomes an ongoing ordeal.
The popular television show Pawn Stars taught us all the tricks to selling objects that are historic or just plain odd. They never seem to show anyone handing over their dinosaur eggs or Civil War-era pistols in exchange for a loan, though. But that’s just how you could get a small loan from a pawn shop. They’ll use the valuable item you bring them as collateral in exchange for the loan—the more valuable the item, the bigger your potential loan. The downside, of course, is that if you fail to repay the loan, they can sell your family heirlooms to the highest bidder.
Most small-dollar loans are regulated at the state and local level, so the interest rates do vary depending on where you choose to pawn your treasures. It would still be safe to expect high interest rates. On the bright side, pawn shops won’t run a credit check and won’t affect your credit score if you fail to repay the loan—they’ll just sell off the collateral. In that way, it can be less financially risky … as long as you value avoiding a collections agency more than you value your grandma’s wedding ring.
When in Doubt, Save
You’ll never need a short-term emergency loan if you already have an emergency fund. A well-apportioned emergency fund can help counter life’s more unwelcome surprises—from a blown tire to a medical emergency. If you always have, say, $1000 set aside, you won’t need to apply for any payday loans (they’re usually for much smaller amounts anyway).
Once you are back on your feet, you can focus on paying your bills in a timely manner (your credit history), and paying off your debt—two factors that greatly impact your credit score. Mixing credit cards and installment loans can also help boost your credit score, as long as you don’t miss any of your payments! It’s called the credit mix, and while it’s a minor factor compared to your credit history, it’s never a bad idea to show a certain amount of financial prowess.
The more diverse your credit mix, the better—and it’s worth up to ten percent of your score. Credit bureaus will take note. And if a better score is only 20 points or so away, that is a very attainable goal!