- Personal Finance
Loans for those with Bad or Poor Credit
Loans for those with bad credit
Those with poor credit or a poor credit score face a considerable obstacle in obtaining loans. The global economy has taken a nose dive. And, many consumers have witnessed their credit scores suffer in kind. In the past, poor credit, did not necessary equate to no credit. But, the housing and bank meltdowns have helped transform the lending marketplace. Now, those with tarnished credit may find themselves on the outside looking in when loans are granted. However, there are still opportunities for these borrowers who desire loans.
What is considered poor credit
Your FICA score is designed to measure how you handle credit and is a blending of the scores of three crediting reporting agencies--Equifax, Transunion and Experian. This score can range from 300 to 850. According to Equifax in 2010, the scores of 40% of the population falls in the 745 and above range. Forty percent of scores fall in the 620 through 744 range. And, 20% of credit scores are below 619. A general rating score follows.
750-850 - Excellent
749-720 - Very Good
719-690 - Good
689-620 - Fair
619 & Below - Poor
Many factors can contribute to a poorer credit score such as sustained delinquency, recent or many minor delinquencies, high ratio of credit to actual credit card limits, limited credit history due to newer accounts and simply too many accounts. Of course, a bankruptcy will pretty much demolish a credit rating and will stay on your file from 7-10 years.
Ways to Improve A Bad Credit Score
A poor credit score can be improved with time and a diligent effort.
1. Pay bills on time
2. Pay down debt instead of charging to card limits
3. Avoid closing accounts, particularly accounts you have held for a period of time
4. Avoid opening a lot of new accounts
5. Try not to take on any new credit for at least 90 days before applying for the loan
6. If your credit score is low due to a lack of credit history or bankruptcy, you can obtain a secured credit card to start a payment trail.
Before You Apply for the Loan
As mentioned, the days of easy credit have become obsolete, not unlike the eight-track tape. You will increase your odds of getting a loan with these steps.
1. Get a copy of your credit report. You can obtain one free report a year from annualcreditreport.com. Note, many organizations are advertising a free credit report, but are actually trying to get you to buy other products. There should not be a charge for the report.
2. Articulate why you need the loan. If you are simply robbing Peter to pay Paul and plan on using the loan to pay on another credit account, consider if you should be exploring another option such as debt consolidation.
3. Go to a nonprofit agency for credit counseling. This shows potential lenders you are concerned with addressing the cause of your credit problems. Getting advice and financial educaton is a good idea even if you are not pursuing a loan.
4. Pay down some debt. This may sound counterproductive, however, if you have a few months before you need to apply for the loan, paying down some of your existing debt should weigh in favorably with potential lenders.
5. Consider what type of loan. A lender is more opt to lend you money if you have collateral (security) to back the loan up. Common forms of security include a vehicle such as car, boat or other assets which can be liquidated for cash such as appraised jewelry, collections, etc. A home equity loan is secured by the value of your home.
However, an unsecured loan is more conducive to rebuilding your credit history, although, it may come with a higher interest rate.
6. Establish a relationship. Poor credit will limit your borrowing options. You may want to focus your effort on one or two lenders. Meet with them and stop in periodically -- to say, open a safety deposit box, open a savings account -- to maintain contact and establish a relationship prior to making loan application.
1. Consider approaching a family member or friend. You've undoubtedly heard that you should never borrow from those with whom you are close. Many a relationship has been strained because of unpaid loans. Consider this route carefully and make sure you deem this move as binding as an agreement with a financial institution. Spell out the terms of the loan, payment amount and schedule, interest and any late payment penalties. Both parties should sign the agreement and receive a notarized copy.
Also, consider having someone with good credit endorse your character and join you as a cosigner on the loan. The cosigner has a legal obligation to payoff the loan if you default. Their signature reflects their trust that you will repay the loan.
2. Apply at traditional financial lending institutions. If you have a relationship with a bank, start there. You may want to preface your actual application with a phone call to the loan officer to get some idea of loan requirements. If you decide to pursue the application, put on your good suit and meet with the lending officer. Bring all the documentation you need to show you are a good candidate including current bills and a budget showing you have plenty of wiggle room to pay the loan back. Even consider the unorthodox and bring favorable job reviews and/or an endorsement from your boss, pastor or other notable.
3. Apply with the Small Business Administration. Some loans are regarded more favorably -- such as mortgage, education,business loans -- than others. If you need money to finance or accelerate a business, you can sometimes obtain a SBA loan even if your credit is not great.
4. Investigate online sources. There are numerous lending sources on the Internet. Using the web gives you the opportunity to compare multiple rates. Do some homework if you are not familiar with the lender. Start with the Federal Trade Commission and the Better Business Bureau. Carefully compare interest rates and terms. Ask about any additional fees such as application and underwriting to ensure you are comparing apples to apples. According to Bankrate in 2010, the national average fees a homeowner paid for a mortgage loan of $200,000 was $3,741.
5. Take a loan from your 401K account. This option is feasible if you have savings accumulated, you don't plan on retiring in the near future (so you have time to pay the account back), and feel your job is reasonably secure. If you leave the company, you have to pay the money back. Note, this is not the same as taking a withdrawal from your 401K. You are actually taking a loan and will repay the loan amount back to your 401K account so you will not be hit with the huge penalties associated with an early withdrawal -- unless, of course, you don't pay it back.
6. Take a withdrawal from your 401K account. This is the last option you should consider since you will be drawing from precious retirement funds and you will have to pay taxes and penalties for initiating an early withdrawal. However, if you are unemployed and need the money to avoid foreclosure or another eligible event, you may be able to avoid the 10% penalty. Talk with a financial adviser, accountant or the IRS for tax implications. Once again, some financial experts recommend filing bankruptcy before withdrawing from a 401k so consider this move soberly.
Poor Credit vs Good Choices
If you are already burdened with debt and/or a poor credit score, you should examine your reasons for wanting a loan judiciously--hopefully with the help of a credit counselor or advisor. Keep in mind, that you don't want to add to any bad debt you may have. Bad debts decrease in value.
A car loan is considered bad debt. Yes, transportation is important. But, like the saying goes, the auto's value goes down as soon as you drive it off the lot. The exception to this rule involves collectable cars. Credit card debt represents another bad debt.
Some would say any debt is a bad debt; however, there are some debts that are regarded more favorably.
1. Mortgages. Historically, now is one of the best times to buy a home, but only if you can afford the payments. Interest rates are bottom-feeding low-- around 4% as of August 23, 2010 for a 30-year fixed mortgage. And, there's a glut of home out there with repressed values. But if you have poor credit, getting a mortgage will be more difficult and you can expect to pay a higher interest rate. So, you will have to do the math and decide if the purchase justifies the higher rate. You can always refinance after a year, but interest rates are bound to rise.
Also, unfortunately, the housing mess has resulted in loss of lenders as many mortgages brokers have left the industry. For example, the Indianapolis Star, in its August 23, 2010 article Mortgage Brokers Becoming a Dying Breed, reports that the amount of licensed loan brokers and loan originators has dropped from 4,800 in 2005 to 1,080 in 2010. And, remaining lenders have become much more selective in their lending. Poor credit will limit your loan options, but if you have a job with job history, have the income to comfortable make the payments, and can show you have been paying your bills on a timely basis, you can improve your odds.
Check with your credit union. If a house is in foreclosure, ascertain the bank holding the mortgage and make them an offer. They will want to get rid of this burden, particularly, if the mortgage hasn't been paid for six months or more. But you will have to show them you have the means and history to pay off this mortgage.
2. School loans. Recent regulation has redefined how schools, particularly, community and online colleges, lend out money But, generally, these loans are less difficult to obtain. An investment in education is considered a good debt.
3. Business Loans. Your business should accelerate in value or you wouldn't even consider opening it, right. Present a well designed business plan and show you have the expertise, drive, and resources to make it go.
While the U.S. market continues to sputter, not unlike a premium car on cheap gas, there does appear to be hope, even for those mired in debt. Poor credit loans and solutions are available. But, those with already compromised credit, should carefully analyze their loan needs, employ the services of a financial advisor, increase their financial education through a class and compare sources and offers.
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