Past financial mishaps should not hinder you when starting a new business or covering an emergency. Traditional banking services may reject your loan applications, but a bad credit loan company can help you in these situations.
So, how does bad credit loans work? This guide will walk you through all you need to know about these loans.
What Is a Bad Credit Loan?
A bad credit loan is a personal loan offered to you despite a poor credit score. Many financial institutions provide these types of loans. It includes online lenders, credit unions, and banks.
You can use the loan for anything you want, ranging from investing in stocks to covering medical bills. Generally, these loans have higher fees and interest rates.
What Is Considered a Bad Credit Score?
Generally, any score below 560 to 555 on the FICO scoring model is considered bad. A low score can mean that you have maxed out your credit card or missed out on payments.
Here is a FICO Score Range for you to compare with your credit scores:
- Exceptional Credit – Over 800
- Very Good Credit – 740 to 799
- Good Credit – 670 to 739
- Fair Credit – 560 to 669
- Bad Credit – Less Than 559
Types of Bad Credit Loans
You can classify these loans into two major types. They are Secured Loans and Unsecured Loans.
- Secured Loans: These loans require you to provide an asset for collateral. If you are unable to pay the borrowed money back on time, the lender can legally seize your asset.
- Unsecured Loans: This type of loan does not require you to provide any collateral. However, it is more difficult to get approval for this loan. Plus, the fees and interest rates are typically higher than secured loans.
Who Is Eligible for a Bad Credit Loan?
If the mainstream loan services turn you down, you can consider a bad credit loan. Although different loan companies have different criteria, the below are common for all of them.
- Should be 18 years or older
- Must live within the country’s legal borders
- Should have a current account
- Can demonstrate that you can repay the loan
Risks Involved in Taking a Bad Credit Loan
A bad credit loan can be extremely useful during financially challenging times. Nevertheless, there are some risks associated with these loans.
Therefore, it is vital to be aware of the associated risks, including the following:
- These loans come with higher interest rates.
- APR (Annual Personal Rates) are often manipulated.
- It can include a big upfront origination fee.
- Although lenders generally respect the privacy laws, they are not as guarded as banks.
Tips to Choose a Bad Credit loan
Now that you are aware of the risks involved in these loans, it is vital to go ahead carefully. To make this process easier, you can use the below tips:
- Always review the repayment terms and interest rates thoroughly.
- Choose a personal loan over a payday or title loan.
- Make sure the lender reports financial details to the credit bureaus.
If you want to proceed with a personal loan, make sure you understand the risks that come along.
With bad credit loans, you can even improve your credit score. It is called a debt consolidation loan. Also, remember to opt for a loan with flexible repayment plans.