Top Myths About Bad Credit Personal Loans That Should Not Discourage You
Does your bad credit record get in the way of getting a personal loan? Are you too hesitant to seek personal financing because you don’t have any collateral to offer? While it is true that having an unimpressive credit profile limits your chances of getting approved for loans, it doesn’t entirely stop you from getting financed. In fact, there are lenders that specifically offer bad credit personal loans and other types of financing for borrowers like you.
What Are Bad Credit Personal Loans?
These are personal financing designed especially for people with low or insufficient credit scores. You may have defaulted on a loan in the past or simply do not have any history of financing. Regardless of the circumstances that led to your less than stellar credit profile, you could not qualify for standard loans from both banks and online lending companies.
Just like standard personals loans, bad credit personal financing can be used for different purposes, such as vacation trips, education or buying furniture and appliances. They are also paid back in periodic instalments (weekly, monthly, etc.)However, these loans charge higher interest rates to compensate for the high risk of lending you money despite your poor credit history.
Myths About Bad Credit Personal Financing
Despite the usefulness of bad credit personal financing, there remain many misconceptions against it. Here are some of the most popular:
1. You can’t get a reasonable interest rate and terms.
While your bad credit personal loans come with higher interest rates and less favourable terms than their standard personal financing counterparts, you can still get one at a competitive rate. Aside from credit score, lenders also look into other factors before determining your loan interest rate and term. You may be able to negotiate a lower interest rate and better term if you have:
- Great source of income that reflects a strong capacity for loan repayment
- Substantial down payment
- Expensive collateral, like a real estate property or a vehicle
- Co-signer or guarantor
Sometimes, if you have a good reason for a negative mark on your credit profile like a loan default or if only happened once, you may still be able to get a good offer through the help of a broker—an individual or a company that arranges loans for you for a fee.
2. You need collateral to get approved.
While pledging collateral increases your chances of approval, you can still get a personal loan without providing any. There are lenders that offer unsecured personal loans although they may be difficult to find. They may charge an astronomically high interest rate for the loan or they may require other forms of guarantee, like a co-signer or guarantor.
Before grabbing the offer, make sure you have the financial capacity to repay the loan on the agreed term. Otherwise, you’ll get stuck in a debt trap of the impossibly high cost of the loan and your credit score plummets even lower.
3. Your credit profile and score worsen.
Taking out the new loan can negatively affect your creditworthiness, but it’s only temporary. The “hard inquiries” take a bump on your credit report while you are shopping for a personal loan, as well as the new loan addition on your credit profile that causes a higher credit balance. However, as you make on-time payments and practice responsible credit habits, your credit score improves.
Remember that payment history is the greatest percentage of a credit score. In fact, the best way for you to fix a bad credit record is to take on new debt and make regular on-time payments until it is paid in full within its term.
4. You can only get them from the bank.
Banks and credit unions provide bad credit personal financing, usually after pledging collateral or having a co-signer or guarantor. This doesn’t mean, however, that they are the only lending institutions that provide this type of loan.
As a matter of fact, there is a growing number of online lenders that provide personal loans for people with bad credit. These companies generally do not require a minimum credit score but they can only grant funds in small amounts. Because of the high risk involved in lending you money, they may charge a high interest rate and set a short period for repayment for the loan.
5. They’re time-consuming.
While banks and other traditional lending companies generally require a lot of documents that may take days to gather and go through a lot of processes before arriving at a decision, fintechs and online lenders generally do most of the processing online. This enables them to approve or disapprove your application in less than 24 hours.
6. You can’t get approved if you’re unemployed.
Being employed and having a stable source of income increase your chances of securing a bad credit loan but you can still get approved even if you’re not employed. This is as long as you can prove that you’re financially capable of repayment. You will need to present other sources of income, like pension, business profits and investment earnings.
Your lender may also overlook your bad credit if you can pledge collateral, provide substantial down payment or present a co-signer.
Before Applying for a Bad Credit Loan
Check your credit report and improve your credit score before applying for any loan, bad credit financing or not. Aside from knowing your borrowing power, you will also learn the reasons behind bad credit status.
Fix Your Credit Report
Request a free copy of your credit report from the credit reporting bureaus (CRBs). Review all the information it contains. If you see any error or false information, send a dispute letter to the CRBs along with any supporting documents. The investigation will take a month or more depending on the response of your previous lender who submitted the wrong information. If successful, the information will be removed from your credit profile and your credit score will subsequently improve.
If your bad credit is not a result of false information but poor credit management in the past, like past due accounts and loan defaults, try to settle them if you have the financial capacity. Provide a lump-sum payment, pay outstanding judgements and request your lender to remove any records of charge-offs and collection accounts from your credit report.
Do a Loan Shopping
Shopping for loans to compare different offers from several lenders is a smart move. You will have more options to choose from. You can also choose which bad credit personal financing plan works best for your situation before signing for one. Compare offers from at least three lenders and check how the interest costs add up. Just don’t forget to limit your inquiries and pre-approval applications to around 2 weeks. Every time you apply for a loan, lenders check your credit profile. This negatively affects your score as it suggests too many applications and financial difficulties. All inquiries made within two weeks, however, is counted as one.
Loans For People With Bad Credit helps Aussies with bad credit to secure loans with reasonable interest rates and terms. We operate nationwide with offices in major cities to assist clients. Call 1300 769 384 or fill out our Pre-Approval form.
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