Getting a Personal Loan With Bad Credit

"Bad credit? No problem!" We've all seen these ads and as much as we might like to close our eyes and wish it were true we know it's not. Bad credit is a problem. That being said it's not the end of the world. If you're looking for a personal loan and you have assets to borrow against or a cosigner you may not be completely out of luck.

  • Research options
  • Put up assets
  • Borrow within your means
  • Avoid predatory lenders

Secured vs. Unsecured Loans

A secured loan is one where you borrow money against some of your own personal assets like your home. The risk of course is that if you can't make your payments the lender may foreclose or repossess your assets. But if you have bad credit it's going to be nearly impossible to borrow money without putting up some collateral. Lenders won't risk handing out an unsecured loan if your credit is badly damaged.

Borrowing Against Your Home

For many people their most valuable asset is their home. If you own a home there are a few ways in which you may be able to borrow against it.

Home Equity Loan - you can borrow against the equity you've built up at either a fixed or variable rate and pay it off over a set period of time.

Home Equity Line of Credit - resembles a variable rate credit card that's secured against the value of your home.

Refinancing your mortgage - by taking out a second mortgage at a lower rate you can pay off your existing mortgage and take cash out of your home.

Other Loan Options

Not everyone has a home to borrow against and even if you do you may decide against it. There are other assets you can potentially use as collateral.

401K - It's possible to borrow a limited amount from a 401K retirement account. If you're having financial problems this could be a good option. However beware that if you don't pay it back in 5 years you face substantial penalties that will make you wish you hadn't.

Life Insurance - There isn't a lot of immediate downside to borrowing from your life insurance policy but of course in the event you die your beneficiary will receive less.

Cosigner - if you're out of options and you still need a personal loan you can ask a friend or relative with good credit to cosign. The cosigner will be personally responsible for the payment of the loan if you default so carefully consider the risk to your relationship with before asking someone to cosign.

There are other more risky loan options like payday loans. But if you're already in financial trouble you're best to avoid them. Whatever you decide borrow as little as you have to and have a plan to pay it back. Most of all be aware that if a loan offer sounds too good to be true it probably is.

Sources:

Federal Trade Commission:
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre06.shtm
http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm

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