Prevent a Situation Where You May Need a Bad Credit Loan

Bad credit loan usually refers to a loan that is given to a borrower with bad credit history due to late payments and defaults on a loan by the individual. Financial institutions typically do not lend money to individuals with poor credit history because of the high risk of default (see a list of lenders here: Life on Credit). But, when a financial institution advances money to an individual who has poor debt ratings, they charge higher borrowing cost increasing the total repayment amount. Two types of bad credit loans exist; secured and unsecured loans. Secured bad credit loans are mostly pledged by a house or a plot that is in ownership of the borrower. Unsecured bad credit loan is not backed by any property, land or vehicle and thus is not awarded generally nor is it very common.money1

Usually obtaining a bad credit loan is considered a decent way out for individuals who possess poor credit rating, yet, getting such a debt may offer a host of issues. These problems need to be considered before making a decision to get a bad credit loan. Since bad credit loans usually charge a very high interest rate, it is possible that getting such a loan to fulfill some immediate need may prove to be disastrous to your current debt problems. Usually bad credit loans charge an interest rate of 15 points more than the prime rate.
Additionally, individuals may put themselves into a vicious cycle of loans if they are obtaining a bad credit loan due to their default on a previous loan. This may put you in an irreparable position. Therefore, to prevent such a situation from arising, it is necessary to avoid a hasty decision in getting a bad credit loan. You can also ask your closed ones for assistance in your time of need to support you in making a better conclusion.

You may also prevent a situation where you need to get a bad credit loan by organizing your expenses and preventing any unnecessary expenditures. Once this is done, you may be able to save some amount every month gradually relieving yourself of your debt problems. Additionally, it is also considered wise to make monthly budgets and plan ahead in order to prevent yourself from landing into a bad credit situation.

Prior to reaching a conclusion of obtaining a bad credit loan, it is wise to analyze various parts of the debt and then arrive to a conclusion. Looking into other options is useful because it aids you in matching the interest rate and the length of the loan that different creditors may propose. Besides, paying a large down payment is also useful as it lowers the loan and hence lightens the burden of responsibility on the borrower.

Types of Bad Credit Lenders and Financing Options They Offer

If your credit score is tarnished, you may find it hard to qualify for a loan with a favorable interest rate and terms. Borrowers can choose from different types of lenders, including brick-and-mortar banks and non-traditional entities.

The type of loan to apply for depends on the purpose, i.e. whether you are a first-time home buyer or need cash for repairs, home improvements, major purchases, and so on. Some financial institutions offer mortgages to borrowers with fair credit. Borrowers with poor credit are often offered adjustable rate mortgages and higher interest rates.

Borrowers with poor credit have better chances to qualify if they offer a sizable down payment. Borrowers can choose from different types of mortgages, including standard and high-ratio loans. There are different down payment sources such as your life insurance policy, savings, stock options, and others. To find money for the down payment, you can liquidate assets such as collectibles, works of art and vehicles. A considerable down payment of 20 percent or more means a better interest rate. The combination of a considerable down payment and passive and active sources of income increases your chances of approval.

It is important to demonstrate a steady income stream which shows that you are able to make payments toward your mortgage. Lenders that offer secured loans require some valuable asset to be offered as collateral. Applicants with fair or bad credit who offer collateral are more likely to get approved. Financial institutions accept various types of collateral, including home equity, credit claims, structured securities, and others. Banks also accept assets and investment vehicles such as works of art, your life insurance cash value, and annuities. Unsecured or bad credit loans are another option for borrowers with compromised credit, but they are less likely to get approved. In addition to a higher interest rate, another issue is the shorter term of repayment. The requirements and criteria depend on the lender, type of loan, amount, and other factors. People are also asked about their income level and employment details. Whether you are contract or probationary employee is also taken into account. Whatever the case, make sure you list all sources of income, including part-time employment, rental income, cash gifts, cash in savings accounts, and others.

Approval also depends on your income level, i.e. a high income is considered a compensating factor. Whether you are a casual or part-time employee is also taken into account. Getting a second job and seasonal income also increase your income level.

There are differences between secured and unsecured loans, and one is that the latter come with shorter repayment periods. A shorter term means higher monthly payments, but borrowers pay less in interest charges. If you have poor credit, a loan with affordable monthly payments makes it easier to build credit, especially if you have multiple debts.