It can be a huge challenge to improve your credit score, but for most people it is one of the most crucial elements in securing your financial future. A bad credit score can set you back in your career and life as it hinders you from acquiring a loan.
Still, there are loan companies (in the crypto industry and outside of it) that cater to individuals with low credit scores. Here’s everything that you need to know about bad credit loans.
What is a bad credit score?
A credit score of 670 and under is regarded as a bad credit score. Usually, a bad credit score occurs after a bad credit history, such as not being able to repay your debts on time.
Bad credit scores generally mean that the client has a history of not paying their bills and debts in time. That is why they are viewed in a negative light by banks and loan providers, they make you a risky client to lend to.
There are several reasons why you might have a low credit score. Usually, a low credit score occurs because of:
- Late payment of your bills
- Late payment of your debts
- Taking out credit unnecessarily
- Defaults
- Bankruptcy
Bad credit score makes it more difficult to acquire loans. However, each company has its categories and policies for servicing individuals with ‘bad’ credit scores.
Can you get a loan with a low credit score?
You can, but usually on different terms than people with higher credit scores.
Certain loans, categorized as ‘bad credit loans’, can only be acquired by individuals with a poor credit score who are seeking to borrow money for a specified period.
As mentioned above, there are some lenders that specialize in borrowers with poor credit; these companies will be willing to overlook your poor credit score to provide you with a loan. Such companies also view individuals with low credit scores more positively than other companies do in that they do not flat out refuse working with them.
Most people with a low credit score or not enough credit history are only eligible for bad credit loans. However, if you have a decent credit score, you may be able to qualify for homeowner or guarantor loans.
What is a Bad credit loan?
As the name suggests, a bad credit loan is a means of providing for those individuals with a poor credit score or those who do not have enough credit history to qualify for other loans.
The terms of bad credit loans reflect the increased risk the creditor undertakes. This means that bad credit loans usually have high interest rates, higher than other loans, and the total loan amount is usually relatively low. These factors help lower the risk assumed by creditors.
If you only qualify for a bad credit loan because of your lack of credit history, then instead of looking at your credit history, companies will review your financial circumstances to see whether you will be able to repay the loan or not.
Still, if you have a poor credit history (or none at all), a bad credit loan is the best option for you.
Types of bad credit loans
- Personal loans: One of the most commonly used loans is personal loans; these loans involve borrowing a specific amount, which is to be repaid within 1 to 7 years. The best part about these loans is that they have a fixed interest rate, so there’s no ambiguity on how much you’ll have to pay back to your lender every month.
- Homeowner loans: Your house is used as collateral to secure homeowner loans. For this reason, it’s easier to borrow a substantial amount when you acquire a homeowner loan. However, there’s a high level of risk attached to it; you could potentially lose your home if you fail to repay your debt. Interest rates for homeowner loans are usually not high, and these loans can have a repayment period of around 20 to 25 years.
- Guarantor loans: These loans involve an individual, preferably a relative, promising to make repayments on your behalf in case you find yourself in a situation where you cannot. If your guarantor has a good credit history, you might just be able to acquire the loan at a lower interest rate.
Does a personal loan impact your credit score?
Initially, applying for a loan will cause your credit score to go down further. Lenders need to pull out hard inquiries on the people they are lending money to, and hard inquiries usually cause a dip in your credit score.
However, this drop in your credit score will be temporary, and practicing good credit habits will help boost your credit score. By making your payments on time, you can increase your credit score in the long run.
A bad credit loan will also help you with your credit mix (that is around 10% of your credit score), which will further cause a rise in your credit score.
Bottom line
While there are pros and cons to bad credit loans, they are one way of improving your credit history and proving to companies that you are a trustworthy borrower.
Bad credit loans can boost your credit score if you’re regular with your payments.
Over time, as your credit score starts to increase, you’ll gain credit history and will be able to secure new loans at much better terms in the future.
All you have to do is stick to your monthly budget and be prompt with your payments. This way, you’ll secure a future free from financial worries for you and your family.