In today’s economy and the current coronavirus pandemic, you must be prudent about handling your finances since you never know what the future holds. It might be morbid to think about death, incapacity, and accidents. Nonetheless, it’s also practical to acknowledge the probability that these things will happen to you. That’s why you should always have a financial safety net.
One of the options that people with good credit rating have is to borrow money from banks when they need funds for emergencies. Their credit score gives them access to low-interest rates, and they may enjoy a smoother application process.
However, those with bad credit may find it challenging to take out a loan from traditional financial institutions. Lenders use your credit rating to gauge your trustworthiness as a borrower. If they see your bad history, there’s a high likelihood that they’ll reject your request to borrow money.
Fortunately, there are companies that offer bad credit loans to clients who need additional funds for health emergencies and other urgent situations. Some banks and online lenders offer this type of service. If you have a credit rating that’s not so good, it’s wise to know where you can apply for it.
Here are the ways that you can get a loan even with bad credit:
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More prominent and established banks may prioritize customers with good credit rating, but smaller ones may have programs for those with bad credit. However, you must check the interest rates and other additional costs that you may end up paying due to the score that you’ll bring to the table.
Banks may offer you a secured personal loan. However, you’ll need to provide collateral, such as your home or car. This type of personal loan will get you a slightly favorable rate, terms, and loan limits since the collateral would serve as a great incentive for you to repay your debt in a timely manner. The chances are also higher that you’ll be approved for a secured loan if you have bad credit.
If you’ve been a client of your bank for a long time, they may also offer a minimal overdraft agreement, but the terms will still vary according to your banking history. Consult with a representative so that you’ll know the conditions that you can expect.
Another option that you have is to get a cash advance, especially if you took out a credit card with your bank. It’s a short-term loan, which depends on the amount available on your card. It’s also very liquid because you receive the money in cash, so it’s useful for emergencies. Still, it typically has a high-interest rate. Plus, you may need to pay back the entire sum on the next billing date.
2. Online Lenders
Online lenders have also soared into popularity recently due to the development of apps and the extensive reach of the World Wide Web. The primary characteristic of these companies is that everything’s done electronically, from application, approval, to disbursement of funds.
Payday loans are the most typical loan type that you can find with online lenders. The process usually doesn’t entail credit checks, so it’s useful for people who don’t have the time to improve their credit score.
However, this kind does have the disadvantage of having a shorter period and high-interest rate to make up for the reduced number of days that the company would have profited from your debt. It also has a lower loan limit.
Bad credit loans may also come in the form of emergency loans. They typically have the same terms as a payday loan, but under a different name. They may also have a faster turnaround time.
These are the factors that you should consider when choosing an emergency loan:
- Disbursement Speed – If you need the money urgently, you must check this aspect to ensure that you won’t have problems with the disbursement process. After all, it wouldn’t make sense if the funds won’t arrive right when you need them.
- Loan Fees – While speed is the most crucial factor for your emergency loan, you still need to consider the additional costs that may entail your application. A majority of online lenders subject you to a pre-qualification process, which is, essentially, a soft credit check. The process also gives you more information about your rate and term without affecting your credit score.
- Additional Features – Look at the lender’s payment options and other features. Some companies allow you to select a convenient payment due date, while others forgive late fees for a specific period. You can also benefit from their financial education program if they have one.
3. Credit Unions
Another alternative to consider if you have bad credit is credit unions. These can be programs developed by businesses for their employees and members. These non-profit programs are financial cooperatives that offer members traditional banking services.
A credit union works by having members purchase shares of the cooperative. Then, the money pool collected allows the credit union to offer loans to shareholders, so to speak. The income generated from interest is channeled to funding projects and services that are advantageous to the interests of the group.
Credit unions may have fewer options than traditional banks, but they provide better rates for the members. The earnings of these organizations are exempted from corporate income tax.
Becoming a member typically entails living in a particular area or working in a specific industry. You also need to purchase a share and open an account for a minimal fee. This type of bad credit loan is ideal for non-health emergencies, like home or auto repairs, which are urgent but not life-threatening.
4. Home Equity
If you’ve been paying mortgage on your residence, you can take out a loan for a portion of your home equity to help tide you through a financial crisis. It’s a secured loan because your house is automatically considered as the collateral.
One advantage of home equity loans is that the interest rates may be lower than other personal loans. Plus, you get a substantial sum of money upfront, which is ideal if you’re in a situation that requires a large deposit.
On the other hand, you run the risk of losing your home if you default on the payment. That’s why you have to check your finances and research thoroughly before making a decision. You must ensure that your monthly budget can accommodate the repayment for the loan, along with continuing mortgage payments if you haven’t completed it yet.
There’s also the home equity line of credit (HELOC) option, which is a hybrid of a home equity loan and credit card. This method lets you take out money from your home equity while having the added benefit of allowing you to borrow only the amount that you need, just like how a credit card works. Still, it automatically considers your home as collateral, which permits the lender to seize your property if you don’t pay your debt. It also uses a variable interest rate, which means that the rate you have for your first loan may not be the same during your second withdrawal.
This loan setup is ideal if you plan on borrowing money to fund small home improvement projects spread out over a period rather than a large one-time renovation. This is because HELOCs don’t disburse funds upfront. Instead, you only take out what you need for the moment.
5. Family Or Friends
There’s another bad credit loan alternative that entails low to zero interest rates. Borrowing money from family and friends may be the best option for you if you need a little bit of money to get you through until next payday. This type of arrangement allows you to negotiate the terms.
Of course, you should still be mindful of your promises and pay them back as soon as you’re able. Your relatives and friends don’t have the same pool of resources as banks and other established financial institutions. The amount they loaned you might have already been assigned to a specific expense in their budget. The least you could do is to repay their kindness by paying them on time.
Improve Your Credit Score
As you can see, neglecting to take care of your credit score can limit your options when you need additional funds for emergencies. If you aren’t in a bind right now, the best thing that you can do is to take the necessary steps to boost your rating.
Here are the things that you can do:
Check Your Credit Report
Ask for a credit report from the three reporting agencies: Equifax, Experian, and TransUnion. They usually offer a free report so that you know where you stand financially. It’s crucial to know your exact score.
Review the document thoroughly and check for errors. Notify the agencies if you spot mistakes or outdated information on your file since incorrect details can affect your credit score.
Your credit score is affected by the following factors:
- Payment History – Your promptness in repaying your debt significantly affects your score because it shows creditors your trustworthiness as a buyer. This aspect makes up 35% of your total rating.
- Amounts Owed – This component evaluates your credit utilization ratio, which compares the debt you’ve accumulated to your available credit limits. It comprises 30% of your score.
- Credit History Length – Fifteen percent of your rating is influenced by how long you’ve had your credit line. However, having a lengthy credit history may not be helpful if it’s filled with records of late payments.
- New Credit – The reporting agencies also look at how many new accounts you’ve applied for recently. If you open multiple credit lines simultaneously, you may be seen as a high risk, especially when your income remains the same. This component takes up 10% of your score.
- Credit Types – The kinds of credit lines you have can affect your score as well. However, these only influence your rating by 10%, so you don’t have to worry about not having a diverse portfolio.
Pay Your Debts Every Payday
You may have only one due date for your credit cards and loans each month. However, if you can afford to, allocate a portion of your income to repaying your debt every payday, whether you’re paid twice a month or weekly.
With this, you can finish paying off your debt quickly. Moreover, it’ll help you curb your spending habits because you have to prioritize your needs and forgo your wants for now until you’ve completed your repayments.
To help ease you into this habit, you can set up payment reminders or auto-debit from your bank account. This will lower your credit utilization ratio and improve your score.
Consult With Your Creditors
Don’t be overwhelmed by the thought of contacting your creditors to arrange a payment plan. This is especially helpful if you’ve missed a few payment deadlines. Address the problem head-on and communicate your worries with them. They can offer alternatives that can help you avoid the adverse effects of late payments and considerable outstanding balances.
Consider Consolidating Your Debt
Debt consolidation is also a viable option if you’re paying for multiple credit lines. You can take out a bigger loan for all of your outstanding balances and lump them together into a single payment.
A primary benefit of debt consolidation is that it resets the interest rates for your debts. This means that you get to pay off the principal quicker. Moreover, you can even save on interest rates if you try your best to complete the repayments as soon as possible.
Having bad credit poses a problem when you need additional funds during emergencies since you can’t easily borrow money from banks and other traditional financial institutions. Fortunately, there are companies and entities that still offer loans to people with a low credit rating. You just have to be aware of the speed of disbursement, accompanying loan fees, and other lender features to make sure that you get the best deal.