When you have bad credit, you can hold back yourself from getting a loan at the best rates. But, it does not mean that you have to resort to costlier sources of credit. Here are some things you should know about getting bad credit loans. Have a nice read.
Is It Okay to Have a Bad Credit?
If you have bad credit, does not mean you are a bad person. But, your credit history will be your track record of how well you use and repay credit. Good credit makes it easier at getting loans on good rates, while bad credit can have the opposite effect. Then, what should you do if you need to apply for a loan with bad credit?
Based on a study which is a 2014 Federal Reserve study, 40% of people had surveyed who wanted access to some form of credit did not apply for it because they thought that they might not be approved.
Indeed, there is a possibility at the denial of credit, but bad credit does not mean you will always be turned down for a loan. That’s why, before you resort to expensive forms of borrowing, it is better if you look at some things to know about applying for bad credit loans.
How About Credit Scores?
Here is a comparison that can help you understand how credit and scores work. When you studied in college, you learned different subjects such as math, economics, psychology, and so on. You received individual scores for each assignment and also a score for overall performance at the end of the course.
Then, at the end of the semester, you received one single score called your GPA based on all the work you had done previously in all your classes. Well, that is the idea behind your credit reports and also your credit scores.
Your credit reports have a list of the money you owe, and the details of how you owe the money. Besides, it also contains your history in paying it off as agreed. On the other hand, your credit scores are more like your GPA. Your credit scores are calculated based on the information in your credit reports and they help lenders understand how well you have managed your credit.
When people refer to credit as a whole, they probably often mean both your credit scores and your credit reports. It should be done because lenders generally look at both when deciding whether to approve for a loan for you or not. Usually, lenders look at your credit scores first as a simple snapshot of how trustworthy you are as a borrower.
What Exactly are Bad Credit Loans?
Multiple companies usually generate credit scores throughout credit scoring models. According to FICO’s model, there are scoring models that lenders can use when seeing and evaluating credit applications. According to FICO, here is the definition of the credit ranges.
- Poor: 579 and lower
- Fair: 580 until 669
- Good: 670 until 739
- Very good: 740 until 799
- Exceptional: 800+
People with credit scores at the fair to poor ranges (credit scores less than 670) may have trouble getting approved at some types of loans. You can have bad credit loans for many different reasons. For example, when you miss payments, you can max out your credit cards or have derogatory marks on your credit reports like a bankruptcy or a foreclosure.
Different Credit Score Requirements
Every lender can have his or her cut off credit scores. If your credit scores fall below this cut-off, the lender may will less likely to approve your application of bad credit loans. But, if your credit scores are above the mark, the lender may be more likely to examine and open up your credit reports to see your credit history.
Then, the lender may factor in other things, such as your debt to income ratio, in order to decide whether to offer you bad credit loans and at what interest rate. Usually, lenders consider a credit application in order to know your debt to income ratio. This information will help the lenders to assess if you will be able to afford monthly payment if they approve your credit.
Different types of lenders may have different score requirements at various types of financial products. Qualifying for bad credit loans with credit scores in the 500s may be difficult or costly. But, at some alternative lenders, such as payday lenders may not look at your credit scores at all, but it can charge very high-interest rates.
May I Apply for Bad Credit Loans?
Some people may think that their low credit scores lead to their only option is to use alternative types of loans, like payday or car title loans. These short term loans usually do not require a credit check that would make them appear attractive if you think you will not qualify for a traditional personal loan or credit card.
In fact, these short term loans can lead you to high-interest rates. Regarding a report from the Consumer Financial Protection Bureau in 2014, more than 80 percent of payday loans are rolled over or followed by another loan within 14 days, and keeping people in debt far longer than they may have planned.
It seems easy to understand why the given loans can have fees that are effectively interest rates averaging 400% APR. It can be 30 percent higher at the high end of the scale compared to a typical credit card.
Instead of using payday loans, a better option is to look for lenders that will work with you with bad credit. Yes, those lenders exist, but you have to seek them out. By using bad credit loans, you can get a loan using bad credit without getting high-interest rates such as a payday loan.
Besides, if you can possibly swing it, you may try saving up for big purchases and emergencies before those all things happen. That is why you do not need to worry about taking on the debt until it is absolutely necessary. It also can instead focus on improving your credit.
That’s all the things you should know about bad credit loans. Keep your loan secure when you have bad credit can be hard and frustrating. But, as long as you have reputable lenders who accept you to work with him, it will be okay even though you have bad credit loans.
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