The ABCs of Bad Credit Loans
If you have bad credit, you’re likely worried about finding a loan. And you have good reason to be! No matter how your credit ended up in an unfortunate place, trying to find a good loan with bad credit is like making your way through a financial minefield. If only there was a list of tips, maybe even one for every letter of the alphabet, that would allow you to get the best “bad credit loan” you can.
Well, you’re in luck, because not only does such a list exist, but we’ve included it below! Go through each letter and you’ll be ready to find the loan that’s best for you.
A IS FOR APR
When you’re considering loans, it’s not enough to just look at different interest rates. A simple interest rate can hide all sorts of hidden fees. Instead, you want to compare loans in terms of their annual percentage rate, or APR. The APR is a number that takes interest, fees, and all the other costs of a loan and puts them in one number to allow proper comparison between different loans. That way you don’t have to worry about doing all sorts of complex math to compare different loans.
B IS FOR BAD CREDIT
Bad credit can be a big obstacle to getting a good loan. Jake Sabatino (@LiaisonTech), the PR outreach manager for Liaison Technologies, told us what is considered a bad credit score: “If your credit score is below 620, you have bad credit—meaning it will be difficult to get approved for most loans.” This is what sends most people in search of a “bad credit loan.”
C IS FOR COLLATERAL
Lenders use your credit score as an indication of how likely you are to pay back a loan. Some lenders will be willing to accept collateral if you don’t have a good credit score. Collateral is an object of value that you’ll have to turn over to a lender if you don’t keep up with your payments. That way the lender isn’t taking as big a risk because they know they’ll be able to get something whether the payments are made or not. If you’re considering a title loan, they’ll want your car as collateral. Can you afford to lose your car just for a short term loan?
D IS FOR DEBT TRAP
A good lender wants the borrower to pay back their loan. Once the borrower pays back the principal and interest, they aren’t stuck in debt and the lender gets their money back plus interest. It’s a win-win! But that’s not enough for some lenders. They’d rather you not be able to pay back your loan in time, forcing you to pay a rollover fee to extend your loan. This will lead you into a cycle of debt, meaning that paying your loan back becomes increasingly difficult, and ultimately, impossible.
E IS FOR EMPTY PROMISES
Many dishonest lenders will try to take advantage of you (they know your lower credit score leaves you with fewer options, so they think you’ll settle for their unfair deals). These bad lenders will do whatever they can to try and rush you into signing up for a loan that could put you in an even worse position than you are to begin with. It’s important that you ask whatever questions you need and take whatever time you’re able to find the loan that works best for you and your current situation.
F IS FOR FICO SCORE
Your FICO score is the most commonly used credit score, and it’s the one that lenders are most likely to use. Do you know what makes up that FICO credit score? The largest portion is your payment history: Do you pay back your debts on time? The next largest portion is your amount borrowed. Following that, there’s the length of your credit history: The longer your history (if it’s been good) the better. Finally, there’s your credit mix (the kinds of credit you have) and your new credit inquiries. Too many new credit inquiries in a short time will reflect negatively on your credit score.
G IS FOR GOOD CREDIT
All right, so Jake Sabatino told us what bad credit looks like, but did he tell us what a good credit score is? Of course he did: “If you have a credit score between 620 and 699 you have fair credit. Anything above 700 is good credit and you’ll start to see better interest rates for approved loans at this level. To improve your credit score, pay off your debts and your credit card balances each month.”
Your best option when looking for a loan is to build up your credit score first. But emergencies happen, and sometimes you’ll have to find the best bad credit loan you can.
H IS FOR HARD CREDIT CHECK
We asked Dawn McCraw (@GoCleanCredit) co-owner of Go Clean Credit, to explain the difference between the two: “Hard inquiries can lower your credit score by a couple of points and might remain on your credit report for two years. Luckily, as time goes on, the damage to your credit score typically decreases or vanishes altogether—often even before the hard inquiry disappears from your report.”
And soft inquiries? “On the other hand, your score won’t be impacted by a soft inquiry. This type of inquiry can occur when you get a copy of your own credit report (You can check your own credit history as many times as you’d like, and it won’t impact your score.) This is because you are not viewed as looking for new credit. Rather, you are demonstrating responsible credit management practices. Soft inquiries will also not appear for lenders who pull your credit history.”
Be sure that if your lender is performing a credit check, it’s a “soft” credit check, which won’t affect your credit score.
I IS FOR INTEREST
You’ll have to pay interest on any loan you take out, but the better your credit, the less interest you’ll have to pay. Of course, that means the worse your credit, the more interest you’ll have to pay. This is, unfortunately, a pretty unavoidable reality when you have bad credit. Try to get the best rate you can find (remember to compare in terms of APR) and avoid compound interest, if at all possible because it grows far faster than simple interest and can quickly snowball.
J IS FOR JUST GET WHAT YOU NEED
Most bad credit lenders are likely to set you up with some pretty high-interest rates. That’s why it’s important to only take out the amount you need. Since interest is charged as a percentage of the loan, the more you take out, the greater the interest will be. So only take out what you need to handle whatever financial emergency you’re dealing with at the moment.
K IS FOR KEEP TRACK OF YOUR CREDIT REPORTS
Sometimes your bad credit might be due to errors. That’s why it’s important to keep track of your credit report and contact the credit bureaus if you find any mistakes. You already have to worry enough about managing your credit when everyone is doing their job as they should. There’s no reason you should have to suffer because of someone else’s mistake.
L IS FOR LOAN FEE
APR is important because there can be costs associated with a loan that aren’t shown in the interest rate. Aside from the rollover fee you’ll have to pay if you need to extend a loan, some loans will charge you a fee when you take out the loan, and you’ll likely have to pay fees if you’re ever late on any payments. Always read the fine print and check the APR so you can figure out exactly what you’ll have to pay.
M IS FOR MORTGAGE
You likely remember the sub-prime mortgage crisis. Lenders gave mortgages to anyone they could, without any thought about whether they’d be able to pay it back since they were planning to just turn around and sell that debt to someone else as soon as the papers were signed. It didn’t turn out well for anyone. But some mortgage providers didn’t learn their lesson and will still try and do whatever they can to get you into a mortgage you might not be able to afford. Given that a first mortgage is rarely an emergency expense, you’re probably better off getting your credit up before applying for one, rather than letting someone sweet-talk you into bad terms.
N IS FOR NO CREDIT CHECK LOAN
Have bad credit? Some lenders will give you a loan without performing a credit check. With these “no credit check loans“—ideally—, the lender will still want to verify you have the income to pay back the loan. If they don’t, they’re likely trying to trap you into the sort of loan you don’t want to get yourself into.
O IS FOR OUTCOMES
At the end of the day, you want the loan that will leave you with the best outcome. Figure out what payment terms you’ll be able to handle that will result in paying the least interest. However, it might still be worth paying a greater amount of interest in the end if the alternative is payment terms too short to manage. Better off paying more interest over time than going into serious debt!
P IS FOR PAYDAY LENDERS
This is the important one. No matter what you do. Do NOT get a payday loan. Really. Payday lenders offer incredibly high interest rates and short payment terms designed to get you into the sort of debt trap we described earlier. Avoid these at all costs!
Q IS FOR QUESTIONABLE PRACTICES
Seriously, avoid those payday lenders.
R IS FOR RENTAL ASSISTANCE
One common reason why people with bad credit might suddenly need a loan? Trouble making rent. Before you try and find the best lender you can, it might be worth checking online to see if you qualify for any government rental assistance programs. If not or if you still need help, it might be time to go lender hunting.
S IS FOR SECURED LOAN
A secured loan is one that requires collateral. Secured loans tend to have better rates compared to unsecured loans, but you risk losing your collateral if you can’t make the payments.
T IS FOR TITLE LOAN
Title loans require you to turn over the deed to your car as collateral. Go ahead and avoid these. Unless you somehow have an endless supply of cars hanging around.
U IS FOR URGENT NEED
Getting a bad credit loan is always going to be worse than getting a loan with good credit. But sometimes emergencies happen.
V IS FOR VET YOUR LENDER
Look up any potential lenders online and see what other people have said about them. You want to know who you’re dealing with before you start dealing. Once you sign up you’ll be stuck with them until your loan is paid off, so do your homework beforehand.
W IS FOR WARNING SIGNS
There are certain signs that suggest you should look elsewhere when considering a lender. We already mentioned that you’re in for a bad time if they aren’t concerned at all about your ability to pay back a loan. Randall Yates (@the_lenders_net), CEO and founder of The Lenders Network, offers another warning sign: “If you’re having trouble getting approved for a loan with other lenders, or lenders are telling you that your chances of getting approved are low, be careful when speaking to a lender that claims they will get you the loan easily. This is a sign that the lender is just trying to get a loan to stick. Your odds of approval aren’t any higher with this lender than any other lender. They’re usually just trying to throw your loan into processing and hope it sticks. This can cause consumers a lot of headaches and waste a lot of time.”
X IS FOR XTREMELY SHORT PAYMENT TERMS
On the one hand, short payment terms mean less interest will build up. But the kind of payment terms payday lenders offer are so short, you’re likely to get stuck having to pay “rollover” fees to extend your loan, trapping you in a terrible cycle of debt.
Y IS FOR YOU CAN DO IT
We know it’s tough, but we believe in you! If you do your research and compare different lenders, you’ll find the best loan that works for you right now. We also trust that you’ll be able to get your credit score back up.
Here are a couple tips from Randall Yates to do just that: “Make sure your credit card balances are low. Credit utilization ratios account for 30% of your FICO score. If you carry high balances on your credit cards, it is really hurting your credit score. Pay your balances to less than 15% of the credit limit to ensure you are maximizing your credit score.”
Z IS FOR ZERO
Zero is the number of words related to “bad credit” that start with the letter “z.”
Dawn McCraw is a co-owner of Go Clean Credit and deeply passionate about consumer credit rights. She is an expert in credit reports and scores and establishing credit history as well as the Fair Credit Reporting Act, Fair Debt Collection Practices Act, and other credit and collection laws. Dawn is a certified expert witness for credit litigation, FCRA Certified, and FICO Pro Certified. She is also currently in law school pursuing her Juris Doctorate.
Jake Sabatino is currently the PR Outreach Manager for Liaison Technologies. He is also a licensed loan officer with 5 years of mortgage experience.
Randall Yates, is the founder and CEO of The Lenders Network, an online mortgage marketplace that helps homebuyers find reputable mortgage lenders. As a part of Randall’s successful entrepreneurial career, he spends a chunk of time helping consumers understand their credit and lending his mortgage expertise to help them find the right type of loan. Randall Yates lives in Dallas, Texas with his two sons.