Do you need to take out a loan with bad credit? Personal loans have exploded over the last few years, and more people are turning to personal loans over credit cards for lower interest rates and predictable payments.
These loans can be used to consolidate credit card debt, finance a big purchase, or start a business. That’s the great thing about a loan, it can be used for just about any purpose.
What if you don’t have the high credit score that banks love to see? You can still get a loan, you just need to follow these steps to get approved for a loan with bad credit.
- Check Your Credit Score
The first thing that must happen in this process is to know where you stand right now. You can check your credit score in a number of ways. AnnualCreditScore.com is a resource where you can get your full credit report from the three credit reporting agencies (Equifax, TransUnion, and Experian).
Many credit card companies and websites offer free credit score services so you can keep track of your score and make improvements.
Your credit score will be used to determine if you can get approved for a loan and what your interest rate will be. A score over 700 is usually ideal for lenders. If your score is between 650-700, you can still get approved, you will probably be paying a higher interest rate.
For scores that fall below 650, your options are more limited. You may have to rely on lenders that specialize in bad credit loans.
- Decide How Much You Really Need
What do you need the loan for and how much do you really need? You’re going to pay quite a bit in interest, and it doesn’t make sense to take out more than you need.
Be sure to have a clear purpose for the loan. Make a budget for what the loan will be used for. For example, if you plan to use the loan to start a new business, outline the expenses that the loan will pay for.
- Fix Credit Before Applying
How bad is your credit score? If it’s low, you will benefit from taking the time to raise your credit score before applying for a loan. There are a few factors that make a huge difference in your credit score.
The first thing that has a huge impact is your credit utilization rate. This is the amount of credit you used versus the amount of credit you have available. Lenders see people who have maxed out cards as a credit risk. The fastest way to raise your credit score is to pay off existing debt to get your credit utilization rate down to about 30%.
- Learn About the Different Types of Loans
Before you start applying for loans, you need to know the types of loans are out there. Some loans are better for specific purposes. Here there the main types of loans to look for.
Installment loans are loans that you’re used to seeing. You get a lump sum of money upfront, and you pay the loan back in one monthly installment over a period of time. The installment payments have the principal and interest together in one payment.
There are two types of installment loans. The first is a secured installment loan. This is when a piece of property is used as collateral to make the loan more secure for the banks.
An example would be a mortgage loan. Your home is used as collateral. If you don’t make your payments, the bank can foreclose on the property and take your home. On the upside, these loans have a lower interest rate.
An unsecured loan is common with personal loans. These are loans that have nothing to secure them. If you miss your payments, your account will go to collections.
Payday loans are used in instances where you need a small amount of cash quickly. You can get payday loans no credit check and get cash the same day. You do need to have the fees and the entire loan amount repaid in a short time frame, usually two weeks.
- Shop for Lenders
Once you know the type of loan that’s best for your situation, you can shop for different lenders. Be sure to read the reviews of lenders and work with only reputable ones. Unfortunately, there are many scams out there that thrive on taking advantage of people with bad credit.
- Know the Full Terms of the Loan
Don’t sign anything until you read the full terms of the loan. This is to protect you from shady lenders. Look at all of the fees that they charge, such as administrative fees or origination fees. Some will charge fees if you pay your loan back early, which is called a prepayment fee.
You should compare the interest rates and the full cost of the loan at each lender. Looking only at the monthly payment won’t tell you the entire story of the loan.
- Pay the Loan Back On Time
Once you get the loan, you must pay the loan back on time. Not doing so will only damage your credit in the long run. You need to use this loan as an opportunity to improve your financial situation.
How to Take Out a Loan with Bad Credit
When you need cash fast or you need to make a big purchase, a loan can be a great thing. If you need to take out a loan with bad credit, you have to navigate the shady lenders so you don’t get ripped off.
There are things that you can do before you apply for a loan that will help your cause. That starts by knowing the types of loans available, your credit score, and understanding what the terms of the loan really mean. The more you know and understand about loans, the better off you’ll be in the long run.
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