You and I both know how challenging it can be to manage your finances on a tight budget. Most people deal with various types of unexpected expenses on a fairly regular basis. In fact, it may seem like these unplanned expenses hit you almost every month, which makes it impossible to live on the budget that you have prepared. You may even overspend from time to time, such as by treating yourself to a well-earned night out on the town after a long week at work.
Regardless of the reason for extra expenses, one thing is certain. When you do not have money available to pay for those expenses, credit card balances can easily rise. As they do, monthly payments rise and create additional strain on your budget. You and I understand how challenging it is to pay increasingly higher monthly payments on time. Between rising account balances, late payments and other issues, your credit scores may have dropped.
Applying for a personal loan may seem like an easy and effective way to get the extra cash that you urgently need or even to consolidate your debts and get your finances back on track. While there are potential benefits, applying for a poor credit loan may expose you to various risks or drawbacks that you have not yet considered. Furthermore, some financing options available to you may have unique risks. A closer look can help you to decide if taking out a new loan today is a smart idea for your unique situation and may help you to identify the best financing solution for your specific needs.
Learn About How Credit Scores Are Determined
Your credit scores are a direct reflection of your financial health and responsibility. When you understand how and why credit scores are used, you may have greater insight about the limited financing options available to you.
The three primary credit reporting bureaus review similar financial data, but they may analyze this data in different ways. In some cases, they may collect and process data from different sources. For this reason, you may have three very different scores from these bureaus. This data includes your current account balances, your credit utilization rate, your payment history, the amount of revolving debt to installment debt that you carry and other details. Bankruptcies, judgments and other similar data will also be listed on your credit report and may affect your scores.
Understand Why Credit Scores Matter
Your financial responsibility and health are important to numerous entities, including new creditors, potential employers, possible landlords, insurance providers and others. When your credit score is lower, this can indicate considerable risk to a bank or credit card company as well as to these various other entities.
You may already be overextended or showing signs of inability to meet agreed-upon account terms with other financial institutions. When banks and financial institutions lend you money, they are making an investment, and they want to ensure that their risk is aligned with the expected return. Lending money to an individual with a lower credit rating indicates higher risk, and some lenders may not be willing to take on that risk. Lenders willing to accept the risk may only do so in exchange for a greater return on their part. This return may be through higher fees and a higher interest rate. In addition, lenders may attempt to moderate their risk by only offering a short loan term.
Explore Your Bad Credit Loan Options
The majority of the options for a bad credit loan have features like higher fees, a higher interest rate and a shorter term. Because these financing options are not always available from the primary lending sources that may initially come to mind, such as a national financial institution, you may be wondering what your options are.
Major banks are not the only institutions offering poor credit personal loans. Community banks, online lenders and credit unions are additional sources to consider. You could also take out a payday loan or even apply for a new credit card specifically designed for bad credit applicants. Each of these options comes with a unique set of pros and cons that you should be aware of before applying. These include various risks that can impact your immediate and future financial health.
Apply for a Personal Loan
One of the more common sources of short-term loans designed for individuals with bad credit scores is an installment loan from an online lender, a bank or a credit union. Compared to the other options that may be available to you, these loans have unique characteristics that you should consider carefully before applying.
Regardless of whether you apply for a short-term loan through an online lender, a smaller bank or a credit union, you will find that these financial institutions still have a minimum credit score requirement for their personal loans. They may have a term length that ranges between a few months to a few years, and the interest rate and fees may be much higher than those available under their loan programs for good credit borrowers. Unlike other options listed here, you may benefit from manageable installment payments through personal loans. This makes the financing more affordable and potentially easier to pay off. If you apply for a debt consolidation loan through a credit union or smaller bank, the lender may require you to use loan proceeds to pay off specified accounts and even to close these accounts in some cases.
Take Out a Payday Loan
Another common financing option available to bad credit borrowers is a payday loan, which has unique characteristics that could present additional risk and expense to applicants like you. These loans may be available through online lenders as well as small lenders with a local presence in your hometown.
A payday loan is characterized by a very high interest rate and fees as well as a term length that usually spans across a few weeks. The full payment, including the principal and all interest charges and fees, may be payable within this short period of time. Because of these factors, some applicants struggle to pay off the loan by the due date, and this may lead to the need to roll the payday loan into a second payday loan. This can increase the overall cost of lending and may worsen your financial situation. A similar financing option is a title loan, which is a very short-term, secured loan that uses your car as collateral. Both of these financing solutions have relatively easy application requirements and may put cash in your hands within a few days or less.
Get a New Credit Card
In addition to poor credit loan options that have an installment payment structure, another possibility is to use revolving financing. A revolving financing term is typically associated with a credit card, and there are specific credit card accounts designed for applicants with lower credit scores.
Credit card offers that are designed for bad credit applicants may require you to make a cash deposit up-front or may have a severely limited credit line. These account features may reduce or eliminate your ability to use a new credit card account as needed. Revolving accounts are known for being more difficult to pay off, and they may be more expensive overall than installment loan possibilities available to you. As is the case with some other poor credit loan solutions, you may use these credit card accounts to make regular payments and to re-establish a good credit rating. On the other hand, because credit cards are so difficult to pay off and because you can continue to make charges against the account while attempting to reduce the debt, taking out and using a new credit card presents considerable risk related to the possibility of worsening your financial situation.
Learn About Lender Credibility
When you apply for a new credit card account or a new loan through a major financial institution, the company’s reputation may be well-known to you. However, many loan programs designed for poor credit applicants are available through smaller lenders that may have an unknown reputation.
Some lenders marketing to applicants with bad credit scores have excellent reputations and have established credibility, but others have numerous complaints filed against them. Researching lender credibility only takes a minute to do and may help you to avoid an unnecessarily stress and expensive financial situation. Your leading online sources for research in these areas are the Better Business Bureau and the Consumer Financial Protection Bureau. These organizations provide the ability to research consumer complaints that others have filed against them. While online reviews may seemingly be another easy way to research credibility, be aware that fake reviews on are problematic. For example, some businesses pay consumers to write positive reviews or otherwise incentivize them.
Compare Loan Terms
After finding reputable lenders offering financing solutions that may work well for you, your next step is to compare lending terms to determine which offer may be more affordable overall while also meeting your current financial needs.
Because your need for extra cash is the primary reason for new financing, your comparison begins with analysis of minimum and maximum loan amounts available through the program. You may need to apply for financing to determine the loan amount that you qualify for and to learn about the specific payment that you will be responsible for. Rather than comparing interest rates, review the APR, or annual percentage rate. This reflects the total annual cost of financing, including fees and interest charges. The loan term also deserves your attention. A longer term establishes more affordable monthly payments, but it also takes longer to pay off than a short-term loan.
Review Loan Fees
The loan fees are easy to overlook during an initial comparison, but this oversight can lead to financial loss. These fees impact the total cost of the financing directly and deserve your attention.
Depending on the type of financing that you apply for, you may be required to pay an up-front fee, such as an application fee or a loan inception fee. Some short-term financing options have an annual fee requirement, a credit review fee, a loan underwriting or processing fee and more. If you take out a credit card for bad credit applicants, you may be required to make an up-front deposit of a few hundred dollars or more to establish the account. Upfront fees may eliminate some financing options from consideration if they are unaffordable for you. Other fees can inflate your monthly payment and may increase the challenge of repaying the outstanding balance in full by the due date.
Weigh the Pros and Cons
You can see that the financing options available to bad credit applicants vary dramatically in various ways. There is no single solution that is best for all applicants, so the pros and cons of all options should be analyzed carefully.
In addition to comparing the cost of financing and lender credibility, you also must explore specific pros and cons of the solutions that you are seriously considering. For example, determine how quickly you can receive the funds that you need. Analyze the lending process, and review how much documentation is required to complete the application process. Some lenders even require you to stop by their business location in person and to apply directly. The speed and convenience of the financing solution directly impact the overall benefits of the financing solution.
Analyze Your Financial Situation
Because each potential applicant has unique circumstances and financial needs, a single solution that is ideal for all applicants is not available. You must compare the features of each program against your financial situation as a next step.
For example, you must determine how easily you will be able to repay the balance based on the program’s specific parameters. Analyze the amount of financing available to determine if the loan yields enough cash to meet your needs. To further ensure that the financing is beneficial and affordable for you, crunch the numbers to analyze how the financing will impact your budget. This should take into account new monthly payments as well as the elimination of payments through debt reduction. Remember that additional unexpected expenses may crop up during the financing period, so you should have a reasonable plan in place to pay for such expenses.
Determine If a Bad Credit Loan Is Right for You
While you may have access to one or several financing solutions designed for bad credit applicants, one question remains. Should you take out a new loan if you have bad credit scores?
Several important factors must be analyzed before you can answer this question accurately and comprehensively:
- Will the financing improve your current situation? For example, are you paying off debts with a higher interest rate using the proceeds from your new loan?
- Does the financing impact your available cash reserve to cover emergency or unexpected expenses?
- Can you feasibly and comfortably honor the financing terms without increasing your financial stress?
- Is it better to improve your credit rating before taking out a new loan? Or is the new financing an essential component in your plan to improve your credit scores?
Before Taking Out a New Loan
Taking out a personal loan to get through your current financial rough patch could be an excellent idea. However, you can now see that there are several significant reasons why this may not be the right option for you. Before taking out a new loan when you have bad credit, ensure that the above factors would not place you in a more stressful and challenging situation. Have you already taken out a loan with bad credit? Leave a comment below so that our readers can learn from your experiences.