Getting a Personal Loan with Bad Credit - Mission Impossible?

There was a time when getting a personal loan with bad credit was extremely difficult, if not downright impossible. Luckily, people with bad credit have many more options today than they did just a few years ago. No longer do people with bad credit have to resort to pawn shops, or even worse, illegal loan sharks in order to borrow money. However, because people with bad credit are more vulnerable than their friends with good credit, it is important for them to be wary of the terms of their loans. There are many businesses that thrive by taking advantage of people with bad credit.

Bad Credit Secured Loans - Mortgages and Other Collateral

The widespread availability of borrowing options for people with bad credit is best exemplified by the recent housing boom, in which many people with bad credit were able to qualify for "sub-prime" mortgages. The logic behind giving someone with bad credit a secured loan is that the loan is backed up (or "secured") by some form of property - in the case of a mortgage, a house. The lender assumes that there is a decent chance - perhaps as high as 20% - that someone with bad credit will default on (fail to pay back) their loan, but in the case of a secured loan, the lender can foreclose on the underlying property and limit their loss. For example: If Bob puts $10,000 down on a $250,000 house but defaults a year later, the bank can foreclose on the house and resell it for $240,000 or more without losing any money. In recent years, with real estate values going through the roof, this made it very easy for banks to give home loans to people with bad credit, since Bob's $250,000 house might be worth $275,000 just a year later. The same applies to car loans, although cars rapidly depreciate instead of increasing in value like houses. This usually means that people with bad credit are required to have a substantial down payment, pay an exorbitant interest rate, or both. Dealerships that finance their own sales often pull the trick of charging people with bad credit prices that greatly exceed the value of their cars in exchange for $0 down, no credit check financing. This creates all sorts of problems since you are "upside down" on your loan the second you drive your car off the lot. Houses and cars are not the only things by which loans can be secured, however, since they are relatively liquid (easy to sell), they are the most popular. A bank would have very little interest in securing a loan by your collection of comic books, because the market for comic books is much smaller than the market for homes and cars - but a pawnbroker may be interested in your comics. Pawn shops are, in fact, the original secured-loan lenders, and they never require a credit check. Rent-to-own shops are another variant of secured-loan lenders, although instead of getting cash, you get the item that you would have bought with the cash, and then you pay for it over time (usually at a high rate of interest).

Bad Credit Unsecured Loans - No Collateral, No Problem

An unsecured loan is just what it sounds like - a loan that is not secured by any asset. For example, if you wanted a loan to buy a new TV, few banks would be willing to give you a secured loan backed by the TV, but they might be willing to give you an unsecured loan, at a higher rate of interest. The interest rates for unsecured loans are inevitably higher, since they are riskier to the lender. Because unsecured loans are riskier, they are especially hard for people with bad credit to get. Many banks will not make unsecured loans for people with bad credit unless they have a co-signer with excellent credit, and even then they may be skeptical. But banks aren't the only lenders to which people with bad credit can turn - in recent years, so-called "payday lenders" offering "signature loans" have exploded on the scene. Generally, payday loans are seen as a bad deal for their customers, but that is easy for people with good credit to say. Many people with bad credit are happy to have a new option where previously they had none. In 2005, U.S. consumers (mostly with bad credit) took out a staggering $6 billion in short-term, payday loans at interest rates of 530% and higher. When you consider that credit card interest rates peak at about 30%, you can see why many people think that payday loans are a bad deal. Luckily, there is a new alternative to payday loans - person-to-person (p2p) lending. Sites like prosper.com allow borrowers to post loan requests to be bid on by other individuals. Unlike payday loans, which do not require a credit check and also do not help your credit score, p2p loans do assign you a "credit grade" based on your credit score so that potential lenders can evaluate their risk. The good news is that most people, even with the worst credit, are able to get three-year loans for $1,000 at interest rates no higher than 25% - which is a whole lot better than 530%.

Your Financial Education

In one sense, people with bad credit have it much better today than they did in the past - they certainly have many more options. On the downside, many people with bad credit lack the financial education to fully appreciate the pros and cons of the new loan products that are available to them, and they soon find themselves even deeper in debt. Thus, there are two things that every responsible person with bad credit should do: 1) Invest in their financial education so that they can make good use of the loan products that are available to them right now; and 2) Use their new-found knowledge to begin improving their credit so that they don't have to rely on "sub-prime" products. While it is good that people with bad credit have more options, the fact remains that it pays to have good credit, so you should work on rebuilding your credit history starting today.

• Bad Credit Blues - Recovering From the Psychological Effects of Bad Credit
• Bad Credit Myths - Follow the Wrong 'Credit Repair' Advice and You May Damage Your Credit Score
• Fixing Your Bad Credit - The Truth About Free Credit Reports and Credit Repair Agencies
• Getting a Mortgage with Bad Credit - What to Expect from 'Sub-Prime' Lenders
• The Consequences of Bad Credit - Bad Credit, Bad Interest Rates
• The High Cost of Bad Credit - Drivers with Bad Credit Pay More for Car Insurance
• What is Bad Credit? - A Guide to Credit Reports and FICO Scores
• Why Credit Matters - A Summary of the Effects of Bad Credit

• Can bad credit be erased?
• Can I buy a home with bad credit?
• How can I improve my bad credit score?
• Should I use a credit repair service to repair my credit?
• What is considered a bad credit score?

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