When a borrower carries a higher lending credit risk than normal and a low credit score, that is known as bad credit. Generally, lenders avoid giving loans to persons with a history of bad credit as they might not make their payments on time.
The credit history of a borrower is calculated on the basis of several factors such as the number of times the borrower has defaulted in repaying the loan amount, an amount of available credit remaining and the amount borrowed. Your credit score will decrease if a late payment fee is charged or you ask for an extension of time for loan repayment or ask for a renewal of the loan.
A borrower might have been in financial difficulties and not repaid the loan, this leads to a bad credit score. However, this doesn’t mean that a person can never again get another loan.
Even persons with a history of bad credit can get a loan but it will be bad credit loan. But, a bad credit loan attracts a higher interest rate due to the bad history. However, if you have bad credit and need a loan, you should check your chances you have to get a loan, it’s important because if your application is rejected, then your credit score will become worse.
A bad credit loan is a loan for people with a bad credit history. You get a bad credit history:
• If you have defaulted on repayments.
• When you don’t pay your bills on time.
• Or when your loan application is rejected.
• Or if you’ve never applied for a loan before but lenders are not sure if they can rely on you to make the repayments. Thus, making you a risky borrower to some lenders.
When should you consider applying for a bad credit loan?
You will choose a bad credit loan when you don’t have any other options left. If you absolutely must borrow, don’t fall for a bad credit loan.
You should consider applying for a bad credit loan only if:
• You can realistically take a loan and pay it back and in the process improve your credit score.
• There is no way to manage your finances without a loan.
• You want to manage your entire debt and make it one big debt or extend the period of repayment or lower your interest rate.
• You have already taken a bad credit loan, then don’t take any more loans or anything else on credit.
• You are absolutely sure and have planned out your finances and are sure that you won’t default on the repayments. Also, plan for early repayment so as to pay off your loan as soon as possible. This is possible when you know extra money is going to come in your way.
Do proper research before taking a bad credit loan. You need to look for:
• The lowest interest rate that you can get.
• Before applying for a loan, make sure you that you can get it without being rejected, otherwise it will only further harm your credit score.
• Get a realistic idea of the actual rates you will get and make the correct application.
If you have a property or an expensive car or a house or any other major asset, then you can use it as a collateral for a loan. This will give you the option to take a secured loan. Secured loans are given at lower rates compared to personal loans. Sometimes, when you need a large amount, this will be the only option left with you. But you should always make your repayments on time or you might have to part with your asset.
If you think you will have even a little difficulty in making repayments, then you should never give your home as collateral. You should take into account various factors before you convert you unsecured loan to a secured loan, particularly if you have a history of bad credit. You may get attractive interest rates, but if you default on your repayments, then you will surely lose your asset.
Unsecured loans are given to borrowers on the basis of their creditworthiness. A borrower doesn’t have to have collateral. But, your credit score must be high to get an unsecured loan. Such a loan is not backed up by any property or asset. The interest will be fixed and must be paid at the end of a specific time period.
To get an unsecured loan, you should maintain a high credit score. You must make all the payments, principal as well as interest, on time and without a single default.
Are there any alternatives to bad credit loans?
Yes, there are certain alternatives that you can look at before choosing a bad credit loan. The options are:
• Talking to your current lender to offer you a custom-made loan taking into account your circumstances. Your current lender will be in a better position to help you figure out your loan requirements rather than going to a new lender.
• You can ask for an overdraft on your current account at 0% interest rate up to a certain amount. Never cross your overdraft limit as the undiscussed overdraft charges can turn out be very expensive and hit you hard.
• Community operated credit unions can be a real alternative to regular banks for those going through financial difficulties. To get such a loan you need to be a member of the credit union. They are support organisations and their main goal is to help their members.
• Credit cards are another option available to those with a history of bad credit. There are separate cards for persons with bad credit scores. However, they may have higher interest rates or lower credit limits. Also, keep in mind, that a rejected application will worsen your credit score.
• There are also payday loans. But it is advisable not to opt for this loan.
• Using your own savings for as long as the possible can is a good idea. It is better to use your savings rather than paying high interest.
• The government also provides interest-free budget loans for those who can’t afford to pay their rent. But only those with urgent requirements can receive the loan.
• Turn to your family and friends for a loan. You can work out a mutually beneficial deal and they will be much more understanding and willing than any regular lender. You can agree on a stable interest. Be clear as to how you will make the repayment as there is a good chance that your relationship may be affected by this. Agree on a certain time frame and stick to it.
Whatever the problems you face, stay away from informal money lenders. Consult your existing lender and hammer out a deal that will save you from defaults and a bad credit history. The lender will at all times assist you and advise you how to go about improving your current financial status.
In India, bad credit loans are an anathema to lenders. So, how will you get a loan in an emergency and when you absolutely need cash but can’t because of a bad credit score. In such cases, there are several alternatives you can look at rather than taking a loan. If a person with a bad credit score applies to a bank for a loan and the application is rejected, the rejection will worsen his credit score. Now that is something that you would not want to happen.
Your need for quick cash can be solved in a several ways. First off, go talk to your current banker with whom you have done business with for years. It could be a friendly neighbourhood bank where everyone knows everyone and knows your situation well. If you have good relations with the manager, he can surely help you out with a reasonable deal. This way you get a chance to improve your bad credit history by making all the payments and repayments on time or before time. It’s likely, your current banker will understand your previous defaults and your situation and help you out. But, if you try a new banker, he would not be so considerate of your situation and another failed loan application will further harm your credit score.
In India, if you maintain a fixed deposit account with your bank, they will offer a loan up to the amount in the fixed deposit account maintained with them. You can also get a credit card on your fixed deposit amount. Although you might have to live with a lower cash withdrawal limit, it will still take care of your immediate cash requirement. But make sure you never cross the limit given by your banker.
Indians love to save. If you have deposited a certain amount in some bank, break the deposit and use the money, it is still better than getting into debt. Try to keep away from debt as much as you can. It’s always better to figure out a way to manage your expenses. You won’t really need to take a loan at certain times. Some things are not worth the headache of a loan. Besides, there is absolutely no reason to a Secured Loan. It might seem a good option at the time but seeing your car, house or property is not worth the loan you took. It’s always a trap and banks won’t care whether you become homeless, all they care is about their money. If need be, you can always ask your friends and family to help you out. They will be more caring and would not take advantage of your bad vulnerable situation.
Whatever the problems are, stay away from the loan sharks. Consult with your existing lender and work out a deal that won’t make you default on your payments and save you from a creating bad credit history. The lender will at all times assist you and advise you how to go about your current financial status.
Apart from these, there are options like Co-operative societies that provide financial aid to hard-done members of the society. Keep yourself aware of the various lender around your residence. There is always a chance that someone will go out of their way to help you. Also, you can always approach the religious institutions that keep a certain amount set aside to help those in need. If not, you can always turn to family members and friends for favours.
It is always a good idea to turn to your family and friends first as they will take into account your financial situation and not try to exploit your urgent need for money. Also, you can set a reasonable interest rate and the term of the loan. But make sure you do not default on the payment as the relationships may suffer due to this.
Stay away from informal money lenders and from secured loans as there is no way out of the arrangement unless you make all the payments. And if you do take a loan, then make sure you repay it on time and better your bad credit history. For as long as you can use the money from your savings instead of becoming indebted. Always pay off a loan first before taking another one. Do not take a loan unless it is absolutely necessary.
Credit scores usually range from 300 - 900. Traditionally, persons with the credit score of 624 or lower have bad credit.
A Credit score of 625 - 699 is termed as fair, but not all financial institutions accept cases between this score due to their high repayment risk.
A credit score between 700 and 749 is termed as good. Very few lenders (i.e. 10%-15%) don’t accept these cases due to a risk of non-repayment, if any or if it’s the first application for a loan.
But, a credit score of 750 - 900 is termed as excellent and every financial institution, worth its salt, wants to give loans to these borrowers as they always make the repayment.
This article has been contributed by Simran Setia, Content Writer, Loanraahi- works as an intermediary between client looking to take the loan and various existing lenders present in the market. Loanraahi provides various type of loans such as Business Loan, Loan Against Property, Personal Loan, Merchant Cash Advance Loan, Home Loan, Online Seller Finance Loan etc.