If you have a bad credit score, it can be a bit of a challenge to obtain a personal loan. But don't fear - there are still ways around it. In this article, we'll explore all the ways of getting a personal loan even with a poor credit score. We'll give you some great tips on how to get bad credit personal loan and improve your credit score, and we'll discuss the different types of loans available in Canada. Ready? Let's go.
What does it mean to have bad credit?
Having a low credit score can feel like a real bummer – it indicates that you have a history of missed payments, defaulted loans, or a high credit utilization rate. A credit score ranges from 300 to 900, and a score below 650 is classified as bad credit. This can make it tough to get approved for a loan, credit card, or mortgage with bad credit. But don't let that discourage you! There are always steps you can take to improve your credit score.
Make sure your monthly payment fits into your budget
Are you considering getting a personal loan, but worried about monthly payments? Before you apply, it's important to review your budget and double-check that you can manage the various loan payments with ease. Even if your credit score is low, there are still plenty of options available - just note that the interest rate might be a bit higher, making the payments a bit bigger. No matter what, make sure that you can comfortably manage the payments - and you'll be good to go!
Compare bad credit loans
Once you've reviewed your budget, it's time to shop around for lenders and check out the different types of loans available. Different lenders offer different terms, including those that specialize in loans for people with bad credit. You can use online comparison tools to find the best loan offers for you and have some fun comparing all the options!
Getting prequalified for a loan can be an easy way to discover all the borrowing options available to you. Prequalification might not guarantee approval for bad credit loan, but it can definitely help you find the right loan for your needs. Applying for prequalification online only takes a few minutes.
Look into secured loans
If you own a home or have a valuable asset, such as a car, you may be able to obtain a secured loan. A secured loan is a loan that is backed by collateral. If you default on the loan, the lender can seize the asset. Secured loans may have lower interest rates than unsecured loans, but there is a risk of losing your asset if you cannot repay the loan.
Add a co-signer if necessary
If you have a bad credit score, adding a co-signer to your loan application can increase your chances of approval. A co-signer is someone who agrees to repay the loan if you cannot. The co-signer should have a good credit score and a stable income. Adding a co-signer can also help you obtain a lower interest rate.
Gather financial documents
When applying for a personal loan, you will need to provide financial documents, such as pay stubs, tax returns, and bank statements. It's important to have these documents ready to speed up the application process. Lenders and financial institutions may also ask for additional documents, such as proof of employment or residency.
Be prepared for a hard credit check
When you apply for a loan, the lender will review your credit history. This is called a hard credit check, and it can temporarily lower your credit score. It's important to limit the number of loan applications you submit to payday lenders to avoid multiple hard credit checks.
Look for a lender without credit score requirements
Some lenders do not have a minimum credit score requirement. Instead, they will review your full monthly income amount, expenses, and debt-to-income ratio. These lenders may have higher interest rates, but they can be a good option if you have a bad credit score.
Types of bad credit loans
There are two types of bad credit loans: secured and unsecured. Secured loans are backed by collateral, while unsecured loans are not.
Secured loans are one of the types of loans that are an excellent option for those with a low credit score. The notable feature of secured loans is that they require collateral - a valuable asset that the lender can claim if you default on the loan. This could be property, like a home or car. In essence, you’re providing the lender with peace of mind about their investment, as they’ll have a way to recover their money even if you fail to repay. As a consequence, you're likely to be offered lower interest rates with secured loans than with unsecured loans.
On the other side of the spectrum are unsecured loans. An unsecured personal loan doesn't require collateral, meaning the lender is taking on more risk. To compensate for this increased risk, unsecured loans often come with higher interest rates. While you might not risk losing a specific asset if you default on an unsecured loan, failure to repay can still lead to serious repercussions, including damaging your credit score even more and having to deal with aggressive debt collectors. It's imperative to ensure that you can handle the repayment terms when applying for an unsecured loan.
Easily accessible but garnished with high risks are payday loans. Payday loans are short-term, high-interest loans designed to bridge the gap until your next payday - hence the name. They are usually for small amounts and are often used as a last resort for emergencies when other options aren’t available. While they don’t usually require a credit check, their dangerously high-interest rates can often lead to a cycle of debt that's hard to escape. Given the considerable financial risk and potentially negative impact on your credit score, payday loans should be approached with caution. Always consider your ability to repay on time and in full to avoid falling into a debt pit. Remember, if a loan seems too easy to get, it may not be the best option for your financial health.
When it comes to obtaining a vehicle, bad credit auto loans can be a potential route to consider. These loans are specifically designed for individuals with poor enough credit scores who need to finance a car purchase. Similar to secured loans, your newly-acquired vehicle acts as collateral for the loan. This means that if you default on your repayments, your car could be repossessed. While bad credit auto loans can come with higher interest rates due to the added risk of lending to individuals with poor credit, they might be more feasible to obtain than other forms of loans. If managed responsibly, these loans can provide not only a means of transportation but also an opportunity to improve your credit score, provided that you make regular, on-time payments.
Bad Credit Instalment Loans
For those in search of more flexibility, bad credit instalment loans could be an appealing option. These loans allow you to borrow a set amount of money and pay it back in equal monthly instalments over an agreed-upon period. The distinct advantage of an instalment loan is the predictable payment schedule, making budgeting a simpler task. Although interest rates on installment loan might be higher due to the bad credit factor, this setup does make it easier to manage repayments in comparison to a lump-sum payday loan. But remember, the longer the loan term, the more interest you will end up paying over time. That said, responsibly managing a bad credit instalment loan can positively influence your credit score over time, provided you consistently make your payments on time and in full.
What to watch out for
When applying for a personal loan, it's important to be cautious of scams and predatory lenders. Some lenders may charge high fees, require upfront payments, or use aggressive tactics to collect payments. It's important to research lenders and read reviews online lenders before applying for a loan.
In conclusion, navigating the maze of personal loans with a bad credit score can feel daunting, yet there are still routes available to you. Keeping a robust credit score and a sturdy credit history significantly widen your your personal loan lenders' options and offers you more favourable terms. Conversely, with a poorer credit score, you may face higher interest rates and tougher terms.
Rebuilding your credit history can often feel like confronting a mountain, but remember, every journey starts with a single step. There are various credit building tools available to help you along this journey. One such tool is KOHO's Credit Builder, which can substantially assist in reconstructing your credit over time.
It remains critical to compare potential credit unions and lenders carefully, taking the time to understand the fine print of your loan agreements. Remember, your monthly payments should always comfortably fit within your budget. As you work towards improving your credit, you'll boost your potential of securing loans more favourably in the future, thus setting your financial health back on its rightful track.