If you have bad credit you might be tempted to turn to a personal loan company if you need cash.
This is not necessarily a bad idea but the odds are, it won’t be much cheaper than a high-cost credit card debt.
That’s not to say you shouldn’t apply – but I want you to have the right expectations. That’s all.
In this post, I’m going to lay out three things:
- When you should and shouldn’t turn to personal loans if you have bad credit
- How to get the best deal if you go this route and
- A better place to focus your energy.
Before diving in, lets define our terms. What exactly is bad credit?
Well, if your FICO credit score is 580 or less, you officially have bad credit. That doesn’t mean you are a bad person.
It just means you will pay through the nose if you need a loan from most traditional cash sources.
With that in mind, let’s consider the option of personal loans for those with a low credit score.
When you should and should not turn to personal loans if you have bad credit
The average credit score for borrowers who turn to personal loans is about 700. The minimum score that most personal loan companies require is at least 600.
You can still apply for a loan if your score is south of that but don’t hold your breath for a positive outcome.
Even if you have a score of 600 or better and you do get approved for a loan, the rate goes up as your credit score goes down.
In fact, many of these lenders charge interest in excess of 30% per year for bad credit loans – higher than most credit cards charge.
And let’s face it, you can’t justify paying 30% for money unless your life depends on it.
That being the case, if this is the rate they offer you should look into every alternative before taking on such debt.
The only time it might make sense to take a personal loan at such exorbitant rates is if the loan is for a very short period, you really have no alternatives, you are sure you need this money and this is all for real and you aren’t just telling yourself a story.
How to get the best personal loan if you have bad credit
As you may have guessed, I’m not a big fan of borrowing from any traditional lender if you have bad credit because the rate will likely be too high.
If you find yourself in a situation like that it would be much better to approach family and friends and ask them for a loan because the rate will likely be more reasonable.
If that isn’t an option, and you absolutely need the money and you want to go the personal loan route, there are still a few steps you can take that could potentially save you a boat-load of money.
Shop for rates
There are three online personal loan companies I like at this time; Lending Club, Prosper and Upgrade. (Upgrade is a newer entry into the field and they have some very cool features that really warrant your consideration.)
The nice thing is, you can shop each of these companies without wasting a lot of time filing out applications (it takes about 3 minutes max).
In fact you can check your rate without providing tons of personal information and when you do so, it doesn’t impact your credit score as it’s considered a “soft pull”.
Now, chances are, if your credit score is a little on the low side, the offers will all be on the high side. But it doesn’t hurt or cost anything to check so you should do so. Who knows? You might be surprised.
Get someone to cosign your loan
If you can’t get a cheaper loan from family or friends, maybe someone in your tribe will cosign for your personal loan?
If so, and that person has good credit, you might qualify for a much lower rate. That’s very cool.
Keep in mind that if you have a cosigner and you don’t make your payments, the other party is on the hook and they will be forced to make your payments for you.
For that reason, if you go this route, I strongly suggest you prepare a written plan (including your income statement) showing exactly how you are going to repay the loan and where the money is coming from.
This will help reduce the stress of the people you approach and could just be the difference of getting them to sign on the dotted line.
Consider a secured loan
One reason that personal loans can be expensive is because most of them are unsecured. This means that the lender has no recourse if you default other than suing you.
They don’t have any hard assets they can seize that back up the debt.
In other words, if you have bad credit history, the lender’s perceived risk is much greater so they need to charge a higher rate to compensate themselves for that risk.
But if you can back up the loan with an asset that has value, the risk to the lender goes down – as does the rate you pay. This is called a loan that is secured.
Bottom line? If you need money and you have an asset you can pledge that guarantees repayment, you should always at least consider this option.
Obviously, real estate is the best option but other alternatives include automobiles and equipment.
You can also loan against financial assets such as CD’s, other bank accounts, investment accounts, 401ks and retirement funds.
Just make sure you understand all the costs associate with the loan and the real interest rate you’ll be charged.
Just because you have a low credit score doesn’t mean you have to take the first loan offer that comes your way.
If a financial institution tries to take you to the cleaners with a high interest rate loan, step up to them.
If they are charging high rates because of a past credit indiscretion, explain what steps you’ve taken to correct the problem.
Show them how you’ve demonstrated financial and credit responsibility and convince them that their risk is much lower than they think it is.
Of course, sometimes bureaucrats at big companies aren’t known for thinking outside the box so you may not get a positive outcome. But this tactic can’t hurt you so you might as well give it a try.
Fix Your Credit
It almost goes without saying that a permanent and super effective solution to this problem is to simply improve your credit.
I know this is easier said than done but you’d be surprised how quickly you can incrementally improve your credit score if you know the right steps to take.
Remember, you may only need to add a few points to your credit score in order to qualify for a much better rate.
For this reason, if your credit history has blemishes, start cleaning it up pronto.
Don’t Borrow The Money
I’m going to be very frank with you now. If you have a bad credit score it might be that you have made bad financial decisions in the past. It doesn’t always mean this – but often it does.
That being the case, are you sure that borrowing money right now is the right thing to do?
How do you know?
Have you discussed this with a trusted friend – someone who has the kind of financial security you would like to have for yourself?
I always make a point of really getting to know how successful people think and make financial decisions – and then I try to copy their process if appropriate.
In order to re-evaluate, you need to be humble and open minded. But if you do that, how can you possibly go wrong? Ask yourself if you can trust yourself to make the right decision now.
Even if you think you can, what harm could there possibly be by speaking with a trusted friend and spend most of that time listening to their opinion rather than trying to convince them about yours?
Borrowing money can be a smart move. But it can also set you up for years of financial pain and servitude making payments with a burdensome interest rate. If you have bad credit, this issue can be an even greater problem.
If you have bad credit, there are ways to get a personal loan. But the best and cheapest solution may be to not to take the loan in the first place.