Is it possible to get small personal loans with bad credit these days? Well, the current events certainly did not make things easier for the economy.
Everyone currently is feeling the effects of the ongoing pandemic. People have lost jobs, businesses have closed or been forced to downsize, and lenders are not keen to give cash to people without the painstaking process of credit checks.
But because of the impacts of the coronavirus on the economy, most people have been forced to default on payments, something that has affected the credit condition of millions of people.
Generally, it is hard to get personal loans with bad credit, but it is not entirely impossible. If you are looking to obtain a loan but are worried about your low credit score, don’t despair. In this article, we’re going to talk about how to get small personals loans even if your credit is not inspiring.
How to get small personal loans
You can secure a personal loan even with bad credit, but it is more difficult to get good terms and you will have pretty limited options, which are typically super expensive.
While a low credit score can lead you into expansive traps, with a bit of planning and preparation you can be able to avoid these pitfalls.
What is bad credit?
Bad credit is simply your history of failing to pay your bills on time and the likelihood that you will not pay in time in the future.
This is usually expressed in terms of low credit score and it can also apply to companies, it is not just limited to you as a person.
A credit score is just a numerical summary of your credit history. FICO is the most widely used score and it typically ranges from 300 to 850.
The higher the score the better the terms of the loan. This applies to every loan not only personal loans. So for example your house mortgage, your auto loan, etc… will all have a higher interest if your credit score is bad.
What is a bad credit score?
On the FICO Score, a bad credit score is any number below 670. But there is also a good bad score, which is a score between 580 and 669 while a very bad or poor score is between 300 and 579.
You can still get small personal loans even with a credit score between 300 and 579, though it depends on the type of lender you approach.
This is because each lender has its own rules and regulations when it comes to criteria for underwriting personal loans.
But one thing is guaranteed for all lenders – they will look at your credit score when qualifying you for a loan.
Costs of loans with bad credit
As we mentioned above, personal loans with bad credit are usually super expensive and so, it is important that you are aware of the cost of the loan before you accept the offer.
The terms of the loan coupled with the condition of your credit and finances will determine the costs of the loan. Good thing is that the cost will differ with a lender.
Nevertheless, regardless of who your lender is, the costs of loans with bad credit will always be higher compared to good credit loans.
The average interest on personal loans with a maturity of 24 months is somewhere around 9.30%. <ref>According to the Federal Reserve</ref> This is for borrowers with good credit.
On the other hand, personal loans with bad credit for the same period can charge an interest rate of around 14% to 16%.
This is minus the origination fees, which if you include in the cost, can be even more than 16%. Of course, this only applies to loans taken through online platforms such as peer-to-peer lending. This fee is usually not charged if you borrow from traditional lending institutions such as banks.
Even so, it is extremely difficult to qualify for a loan with awful credit in a bank.
Online lenders tend to be more welcoming of people with bad credit and will often charge an origination fee on the loan, which drives up the overall costs of the loan.
For many online lending platforms, charging an origination fee is key to their business model and it is how they make money.
But whether you are charged an origination fee or not, your credit score plays an important role in determining the terms and rates of the loan.
An important thing to remember is that the higher the interest rate, the more you will pay interest fees.
Get personal loans with bad credit
The best way to get personal loans with bad credit is by trying online lenders. The personal finance sector has seen an explosion in fin-tech applications focusing on money lending and this might be the best place for you to start.
- Peer-to-peer lending: Rather than going to conventional lenders such as banks and credit unions, you can borrow money from individuals through p2p lending platforms. This new concept is slowly becoming an alternative to banks and is usually favorable to people with bad credit. Peer-to-peer lenders are often more willing to take risks compared to banks, but the cost will be higher.
- Marketplace lenders: Also non-bank lenders, marketplace lenders accept a certain level of risks and use various creative techniques to determine your creditworthiness. Because of this, they can provide you with a loan with a much lower credit score, sometimes even lower than P2P lenders.
Family and friends
If your credit can’t secure you a personal loan with marketplace lenders or P2P lenders, the most likely solution might be your family and friends.
Family and friends know you and will not ask about your credit history or determine your creditworthiness. But if you chose this route, be sure to do it the right way and involve witnesses and the signing of documents just so that everybody is properly protected.
Aside from borrowing directly from family and friends, you can also use them, provided they have good credit, as co-signers to secure a loan from a bank or other lenders.
This will be risky for your friends and family and will limit considerably their borrowing capabilities until you repay the loan.
As a final resort, you can use collateral to borrow personals with bad credit if all the above methods fail. By providing an asset, it shows that you are serious and the lender will have a significant chance of getting back the money because they can just sell the collateral if you don’t payback.
Final Thoughts: How to get small personal loans
As you can see there are still quite a few ways for people to get small personal loans with bad credit or even without a job. The most important thing is that you try to improve your credit score.
It doesn’t matter if you want to get a personal loan or not, a good credit score will make a world of difference towards your financial goals.
You should start by checking out your credit score, and then find ways to lower it, for example paying off your late payments and focusing on your debt (if you have any).
Another thing that you could do, is to set up a rainy day fund so that when you get hit with unexpected bills and emergencies you won’t have to resort to taking out a personal loan.
If you’re really strapped for cash right now, you could consider personal loans with higher interest rates (because of your bad credit), but make sure to read the terms carefully and try to pay it back on time. Otherwise, you will go deeper into debt and ruin your credit even more.