Poor Credit Loans: Loans For People With Bad Credit

The present economic situation has made a good credit score mandatory for people in need of a loan. An individual's credit score measures his credit worthiness. In the US, the 3 credit bureaus, viz. TransUnion, Experian and Equifax collect and compile information on a person's credit history. Each credit bureau maintains a credit report and provides credit scores based on the credit scoring system created by Fair Isaac Corporation (FICO) in the year 1958. A good FICO score is now a must for obtaining a home loan. Gone are the days of sub-prime lending. At present, a FICO score between 760 and 850 would mean an interest of 5.268% on a 15½-year adjustable rate mortgage, while a FICO score greater than 740 would entitle a person to a 30-year mortgage with an interest rate of 8.101%. A large number of bank failures in 2009 have resulted in banks and other financial institutions enforcing strict lending laws. In this situation, a person having less than satisfactory credit scores will find it difficult to seek loans. Thankfully, there are a number of alternatives for people with a bad credit history.

Loans for People with Poor Credit History

Payday Alternative Loans (PAL): Banks and credit unions offer payday alternative loans for people with bad or no credit history. These loans, which are fully amortizing, are provided for a period of 6 months to 1 year. The APR on such loans is around 22% for people with credit scores below 570 points. In case of a FICO score between 571 and 620, the APR is around 18%, while for people with credit scores over 620, the APR is 15%. A credit score below 620 is generally not healthy. Hence, it is obvious that these loans have been designed for people who need credit, but have a poor credit score. There is no need for any collateral, and generally a person can borrow a maximum of $1000 and a minimum of $300.

Payday Loans: Non-bank financial institutions provide payday loans to people who have a poor credit score, and are unable to obtain other forms of financing. However, the interest rates on these loans is very high and banks and credit unions often consider payday loan providers as predatory institutions. PAL is definitely a better option as compared to payday loans.

Co-signed Unsecured Loans: An unsecured loan does not require any collateral, but a person is expected to have a good credit score. However, a person may be able to obtain an unsecured loan, despite having a poor credit score, if he can get a friend or a relative with a stable income to co-sign. Caution has to be exercised in case of co-signed unsecured loans, since the co-signer will be liable to pay in case of default. A person may be able to improve his credit score because of timely payments which are reported to the credit bureaus.

Savings Account Secured Loans: This a good option for people with poor credit having a savings account or Time Account. They might be able to use the savings or the time account as collateral and obtain a secured loan. Of course, this is possible only if their account is in good standing with the bank, despite having less than perfect credit scores. This is likely in case a person who accidentally ruins his credit score by opting for too many departmental store credit cards, but never using them, or canceling many credit cards after a few days of applying for the same. Seemingly harmless activities like these can ruin a person's credit score. The reason such activities lower the credit score is because the FICO score has a component called credit utilization ratio, which is the ratio between the amount of debt and the amount of credit available. On canceling a credit card, credit availability falls and the credit utilization ratio increases, thus pulling down the FICO score.

Bad Credit Loans/No Credit Personal Loans: These loans are generally unsecured and are provided by non-bank financial institutions. Of course, the rate of interest on such loans can be as high as 19%. Recession might make these loans harder to come by. The borrower should be cautious while availing these loans, since he may be unable to repay the principal and the interest, and may end up further damaging his credit scores.

Debt Consolidation: Debt consolidation is the process of replacing multiple loans with a single loan. This is meant for people who have poor credit scores, and are laden with debt. Such a person can try approaching a debt consolidation agency. The agency may be willing to provide him with an unsecured loan at a lower fixed rate of interest. The amount borrowed from the agency can be used to settle old debts.

This write up was meant to elaborate on the availability of a number of loans for people with poor credit. In fact, it may be possible for them to obtain a line of credit and improve their credit scores at the same time by applying for a secured credit card. A secured credit card, as the name suggests, is collateralized by a deposit made in the bank. The bank then provides the depositor with a credit card having a low credit limit. His credit limit will increase if he makes regular payments on his credit card. The monthly payments, which are reported to credit bureaus, will definitely help in increasing a person's credit score. A person with poor credit scores thus, has access to a line of credit, and at the same time, has the opportunity to improve his credit score.