Taking a Loan When You Have Bad Credit
Need to borrow money, fast? If you don't have good credit, income, and assets to use as security, your options are limited. An unsecured loan for people with bad credit may be the only choice available.
Unsecured loans are loans available without you offering any collateral to the lender. Before you take out an unsecured loan for people with bad credit, it is important to know:
- Why take an unsecured loan
- What lenders offer them
- The risks involved
- The alternatives you have
Why Take an Unsecured Loan?
Unsecured loans for people with bad credit are to be avoided, if possible. Still, there are times when unexpected needs for money arise. If an unsecured loan is the only option, investigate it in a careful and cautious manner. Common needs for unsecured loans for people with bad credit include:
- Debt Consolidation: Taking out a loan to combine a number of high interest debts only helps you if the rate you get is lower than the ones you currently have or if the term of the loan is extended so your monthly payment is smaller.
- Home Improvement: This kind of home improvement loan is not the kind to build a fancy kitchen. It is used to replace a damaged roof or broken water pipe.
- College Expenses: Once a child is partway through school, it is tempting to borrow whatever you need to finance the rest of the school costs.
- Medical Expenses: When a medical emergency arises, it is natural to borrow whatever one needs to pay the medical bills. Unfortunately, medical bills can be so large that medical expenses are the most common cause of bankruptcy.
- Emergency Expenses: When there is a shortfall at the end of the month to cover monthly bills, to avoid having services cut off or even to put groceries on the table.
Each of the needs above is completely legitimate. Trouble arises, however, when the unsecured loan temporarily patches the debt problem that only becomes worse later. Be aware; borrowing for short-term needs has long-term financial consequences.
Unsecured Loan Lenders
There are two main places to get an unsecured loan for people with bad credit. The first is online. The second is from a traditional payday lender.
Online Unsecured Loans
A search online for "unsecured loans for people with bad credit" brings you a long list of Web sites to check out. The sites don't offer much information, but they make many leading promises. The ads make it sound like you will qualify for an unsecured loan no matter how bad your credit score and regardless of the derogatory marks on your credit. If the ads are true, you can have a recent bankruptcy, foreclosure, judgment, or repossession and still qualify.
According to the ads, qualifying for unsecured loans for people with bad credit tout is a piece of cake. The ads promise:
- No Credit Checks
- No Employment Checks
- Fast Approval
- Money Right Away
- Any Size Loan You Need
In reality, it is either difficult to get unsecured loans with bad credit or very expensive. Companies that specialize in them have tightened their lending requirements and raised their interest rates. The internet companies do not make it clear what fees you will pay or your interest rate. When a reasonable rate is mentioned, the fine print makes it clear that the rate is not available to most borrowers.
Often, you have to apply for a loan before you will find out what your fees and rate will be. However, even some of the online lenders that specialize in unsecured loans for people with bad credit scores make it clear that your credit score is the most important variable when determining interest rates.
The bottom line is that unsecured loans for people with bad credit come with high interest rates and fees. Lenders need to offset high-risk unsecured loans for people with bad credit, because they have a high rate of default.
Payday loan are also called "cash advance loans," "check advance loans," or "deferred deposit check loans." Traditionally, payday loans were offered from physical storefronts, often located in working-class or impoverished neighborhoods. Now, in addition to storefront lenders, payday loans are also available online.
To get a payday loan, you give a personal check to the lender. The gives you money, less the fee they charge or deposits it into your bank account. Your loan is due on your next payday. You write a personal check payable to the lender for the amount you want to borrow, plus the fee you are charged for the loan.
Payday loans can be very dangerous, but are a common solution for borrowers with bad credit who are seeking an unsecured loan. Fees are high, ranging from $15-$30 per $100 borrowed. If you don't have the funds to repay the loan as agreed, you may be offered a chance to extend or "roll over" your loan. This can be very dangerous. Penalties and interest grow rapidly. Interest can accumulate at over 1,000% annually!!!
Never take out a payday loan, unless you're certain that you can repay it on your next paycheck. Otherwise, it is a debt trap that is hard to escape from.
The Risks of Predatory Lending
Some unsecured loans for people with bad credit fall into the category of predatory loans. Predatory loans are a type of loan that are marketed to people with limited borrowing options. Predatory loans charge high fees and interest and often trap borrowers into a cycle of indebtedness. Some predatory loans are made by a lender with enough information to know that the borrower can't repay the loan, but makes the loan anyway, as part of a strategy to reap high penalties and collection fees.
Government regulation is not heavy for high-risk unsecured loans for people with bad credit. That may change with a new regulator on the scene, the Consumer Financial Protection Board (CFPB). It is very likely that unsecured loans for people with bad credit will be more closely regulated and monitored.
Alternatives to Unsecured Loans
If you are struggling with debts and bad credit, and you need some cash to cover a short-term need, an unsecured loan may be your only choice. However, it is only going to increase your debt. If you are looking to solve a debt problem when you already have bad credit, there are three main alternatives. You should examine:
- Credit Counseling: If you are struggling with high-interest credit debts, a credit counseling program may recommend that you enroll in a debt management plan (DMP). A DMP can lower your interest rates on your unsecured debts, so your monthly payment goes farther and you get out of debt faster, usually in about 4½ to 5 years.
- Debt Settlement: Debt settlement is a more aggressive way to solve a debt problem, where a reputable debt settlement firm negotiates reduced balances from your creditors. This can get you out of debt in the shortest time and at the lowest cost while avoiding bankruptcy.
- Bankruptcy: Bankruptcy is an option of last resort. It severely harms to your credit, staying on your credit report for up to 10 years. If you qualify for a Chapter 7 bankruptcy, it can wipe out your debts, though you may have to sell assets you own. However, you may not qualify for a Chapter 7 bankruptcy.
You are the first line of defense. It is up to you to watch out for yourself. "Buyer beware" is good advice. Make sure that you know the costs of any loan you take out. Understand how much you have to pay each month. Take the time to consider how likely it is that you won't pay the loan as agreed. Be sure that you know what the consequences of a missed payment are, in terms of penalties and increased interest.
It is difficult, if not impossible, to borrow your way out of a debt problem. Be sure to look into every alternative to taking out an unsecured loan for people with bad credit. Examine all your debt relief alternatives, before taking out an unsecured loan.