This article focuses on all the essential details about unsecured personal loans for borrowers with bad credit. It explains what unsecured personal loans are, their pros and cons, the requirements to qualify, key aspects, alternatives, and even some tips for improving credit score. After reading this, you’ll be able to decide whether this loan type is the best option for you.
While it may be difficult to get a personal loan if you have bad credit, it is never impossible. There are plenty of unsecured loan types that borrowers with a poor credit score can apply for if they need cash asap. However, there is a lot to understand about these loan options, especially with their typical rate and terms. And it would help if you familiarize yourself with all of it before you decide to take up a significant financial commitment.
An unsecured personal loan is a type of credit that you can use for just about any purpose. It is called unsecured because the loan’s approval is not contingent on the asset, like your house or car, that you put up as collateral. In other words, you don’t need any tangible guarantee at all to get approved for an unsecured loan.
Lenders will place more importance on credit factors when it comes to unsecured loans. This includes your credit score, debt-to-income (DTI) ratio, and credit history. And they use this to evaluate what kind of borrower you are. Of course, the better score or credit history you present will largely determine how favorable your loan rates and terms will be.
To qualify for an unsecured personal loan, you need to provide key documents along with the online application you initiated. Lenders require proof of identity, which can be your driver’s license, passport, Social Security Number (SSN), or Tax Identification Number (TIN).
Another document lenders need is proof of address. This can be your voter’s registration card, lease contracts, or any utility bill you might have. And, of course, your income proof will also be verified. Lenders may request you submit a copy of your bank statement, pay stubs, or income tax return.
All of these will be necessary so lenders can finalize your application.
Here are the key aspects of an unsecured loan that you should know about:
Interest Rate: Interest rates are the annual cost of borrowing money from the lender and is usually expressed in percentages. Unsecured personal loans for those with poor credit will have higher interest rates than the secured variety for the same reason that your debt isn’t guaranteed by collateral.
APR: APR or Annual Percentage Rate is sometimes confused with interest rates since it also represents the annual cost of the loan and is expressed in percentages as well. However, APR is a more comprehensive cost of the loan since it adds interest rates plus the loan’s other charges like origination fees, insurance, etc. And since it encompasses interest rates, APR also tends to be higher — especially to those with lower credit scores — compared to secured loans.
Funding Time: Funding time refers to how soon the funds you borrowed reflect in your bank account. This usually depends on the lender. Some may offer same-day funding, while others may take between 2 to 7 days before they deposit the amount to your account.
Repayment terms: A repayment term is a specific amount of time given to you for repaying your debt. Lenders may allow you up to five years to pay off your loan. But in some cases, it can be longer than this, which, again, will depend on the lender.
Now, sometimes the cause of your low credit score might be due to a mistake in your credit report. This is a common occurrence that borrowers are not immune to and, if not mended, will bridle your chances of getting a loan.
Some of the common errors on credit reports include account balance and credit limit errors, incorrectly reported accounts, wrongly reported as delinquent, and wrong information.
When you identify any one of the errors mentioned above, you can contact the credit bureau that provided you with the report. You need to file a dispute claiming that you found inaccuracies, and you can do this by mail or online.
From there, you need to wait for at least 30 days so the bureau can investigate and respond. After this, you need to review the results of the investigation and check if your credit report has been updated.
As mentioned, your credit score and history play a huge factor in securing favorable loan rates and terms. What’s more, it also influences what creditors deem as an appropriate amount to lend you. Naturally, if your FICO score, for instance, is rated “excellent,” then you wouldn’t have much of an issue getting the maximum loanable amount, which is $100,000, to some brokers.
But if your score is below 579, that high amount is likely out of the question because lenders find it too risky to lend an amount like that to someone with a poor credit score.
Still, that doesn’t mean that there’s no chance for you to borrow money. There are loan types with lenders that accept a credit score below 450. An example of this is payday loans. There are also credit cards that are intended for those with a low credit score. But, if you go for this option, remember that you’ll likely be paying much higher rates than normal.
To help you weigh out the advantages and disadvantages of unsecured personal loans for bad credit, here is a quick summary of its pros and cons:
Great for building credit: Loans that are catered to borrowers with low credit scores are a great start for building credit because they will usually have more lenient requirements to qualify.
Loanable amounts are not high: Borrowers with bad credit will likely not get a considerable sum with an unsecured loan, but it is possible, in some cases, to qualify for at least $10,000 with some lenders.
No collateral requirement: This is an advantage for borrowers who may not have assets that would pass up as collateral.
Interest rates are higher: The type of loan afforded to those with poor credit scores comes with particularly steep interest rates.
No credit score requirements: This makes it easier for anyone who needs extra funds to apply as their credit score won't directly impact their eligibility.
Few lender choices: Typically, those lenders with better terms and loan amounts are beyond reach for such borrowers.
Quick approval times: And, of course, approval times are much quicker for this type of loan because of the same less strict requirements, and it also means getting your funds as soon as possible.
If at this point you believe that the best option to get more desirable rates, loanable amounts, and terms is to work on improving your credit scores, then here are a few suggestions you can follow:
But if you still think that an unsecured loan will satisfy your present financial circumstance, then one alternative you can use is to apply with a cosigner who has a better credit score. A cosigner essentially guarantees payment of your debt in case you default.
Another option is to pawn something. For instance, if you have gold jewelry lying around, you can use this to get the immediate cash you need. Of course, the downside to this is that pawnshops will never pay the price of gold in full because they need to make a profit if you can’t pay the money back.
And, the last alternative is to borrow from someone you know. It’s always best to seek a relative or friend who can lend you money interest-free instead of getting drowned by debt and interest payments — just make sure you pay them back!
Yes, it is possible, but you have to prove to creditors that you have other sources of income to repay your debt. Usually, if the only reason for your lack of a job is due to unexpected unemployment, but you have a good credit score, there is a good chance that lenders may grant you the loan.
Yes, it is possible. But you have to consider that possibilities are fewer than with a good credit score or better.
A private lender is either an individual or group of individuals who are not necessarily in the business of lending money but may pool funds to finance investments or businesses, one of which may include extending loans with the sole purpose of earning a decent return.
It sometimes is because it frees you of any debt, which saves you money in the long run, and it might even improve your credit score. However, the disadvantage is that you might pay an early settlement fee or a prepayment penalty fee.
Yes, unsecured loans are good for building credit scores because they have more lenient requirements to qualify.