Whether you are trying to improve your credit to finance a home or car or need a good credit history to secure a job, bad credit loans can help. They are not widely advertised. However, they are a great tool in your toolbox to improve your credit score and credit report.
Bad credit loans are traditionally provided by local credit unions or community banks, but sometimes you have to be a member to take out a loan and membership requirements are tough. You must live in a certain county or hold a certain job, and they may not be in the best part of town. Self Lender changed all that by making such loans accessible to anyone with a prepaid debit card or checking account across the country, regardless of credit history. Today we will discuss what a bad credit loan is, why everyone needs a strong credit history and how to get a loan with little or poor history.
What Is a Credit-Builder Loan?
A credit-builder loan, or bad credit loan, is sometimes known as a 'starting over loan' or 'fresh start loan'. It is offered by community banks and credit unions to get you as a customer and help you succeed in your financial life. You can also find bad credit loans online through reputable sites like Self Lender. The concept is similar to a secured credit card in that there is no risk to the lender, but it is also very different. With a secured credit card, you pay a security deposit. This becomes your credit card limit and you can immediately spend up to this limit. With a bad credit loan, the amount you borrow is kept in a bank account. You cannot touch it until the end of the loan, at which point you will receive the total amount you "borrowed" plus 0.1% interest.
Terms and Conditions
Terms of bad credit loans are usually six months, one year or two years. With Self Lender, there is a one-time, non-refundable administrative fee to take the loan out, but it is usually only between $9 and $15 depending on the frequency of repayment. If you cancel the loan, the company sends you the amount you have paid to the principal, but you forego 90 days of interest, much like a CD. Online bad credit lenders allow you to have a prepaid debit card, but most community banks will require you to have a checking account, usually with an attached debit card. However, there will be a convenience fee associated with paying by debit card. Expect to pay 5% of your scheduled payment if you are over 14 days late.
Who Should Consider Bad Credit Loans?
People who should consider bad credit loans are those with no or poor credit such as those recovering from bankruptcy. If you have no credit, such a loan will help you build your credit. If you have good credit but are trying to improve it, there are better ways than a bad credit loan. The new account will bring down the average age of your accounts and negatively impact your credit score. These loans build your credit score by showing six to 24 months of on-time payments, and the company will not report you as late to the three credit bureaus until you are over 30 days past due.
The most accessible alternative to bad credit loans is a secured credit card due to the lack of risk for the credit card provider. All you need is the cash upfront to get you started. Another alternative is a social lending program where around 10 people in the community each pay a certain amount monthly to one person in the group until everyone gets their money back. There is no interest involved in Lending Circles, but through Mission Asset Fund, the on-time payments are reported to the three credit bureaus.
Benefits of a Good Credit Score
We all see advertisements for building our credit, but who cares? Who needs a good credit score, anyway? Let's discuss.
Lower Interest Rates
Improving your credit score improves your chances of refinancing existing loans in a beneficial manner. This means you can get a new loan to pay off your existing loan for a lower interest rate. This reduces the total cost of your loan. If your monthly payment amount stays the same, you will also reduce the length of your loan because more money is going to pay the principal. This is great for your psyche.
Securing a Job
Some jobs require a security clearance or standard clean background check which includes your credit history. Using bad credit loans improves your credit so you are more likely to get hired in the financial sector or for a local, state or federal government position.
Starting a Business
A solid credit history is often more important than a current good credit score for securing a small business loan to start a business. If this is why you are considering bad credit loans, keep in mind you will need a 30% down payment. Good credit is also required if you are trying to raise capital to expand or some other reason. If you already have a small business, your business will need a good track record of paying utilities, rent, credit and installment loans on time.
Getting a Mortgage
We are not all fortunate enough to be in a rent-to-own housing situation or have the cash to pay for a home upfront. Most Americans have to take out a mortgage to finance their homes and, after the housing bubble burst in 2008, potential lenders have significantly increased their requirements. If you have a credit score of 720, you can save tens of thousands of dollars in interest over the life of your mortgage. To qualify in the first place, you must have a score of at least 640 to qualify for a traditional loan and with a score of 620, you need to start looking for subprime lenders. These lenders charge astronomical interest rates to mitigate the high risk of loaning enough to someone to purchase a home. If your potential landlord is an individual rather than a large national company, you will need a credit history with no delinquencies. However, you may be able to negotiate by putting up a much larger deposit.
Financing a Car
If you live in a rural area, your town may not have the adequate public transportation infrastructure to get you to and from work reliably. If you work nights and the buses run in the same direction as your work, you may be taking the last bus three hours before your shift starts. Sometimes, transportation is a necessity, and sometimes, we need to finance it. Bad credit loans can improve your credit score to the extent you are approved for an auto loan.
Tips for Getting a Credit-Builder Loan
The great thing about bad credit loans is that you can qualify with no, little or poor credit history. However, some potential lenders will want proof you can comfortably pay this "loan" back and evidence to suggest you will not default. This means, you do not need a perfect credit report, but you may need an explanation of why you defaulted in the past, such as job loss due to company restructuring, and how you plan to mitigate their risk.
To find a bad credit loan, search Google for your state and bad credit loans. This will show you the closest credit unions or community banks that offer this type of loan. Brick and mortar community financial institutions typically have lower fees and interest rates, so it may be worth it to go this route. If you have no local banks that offer this loan, search for a CDFI (Community Development Financial Institution) in your area. They exist to help lower-income communities, and they may be able to help you build your credit with a loan.
You may have to show proof of income to be approved for a bad credit loan. A potential lender may ask for a bank statement for proof of direct deposit or just the most recent pay stub from your employer. Once you are approved, choose a loan with a repayment plan you can easily afford. Monthly repayments typically range from $25 to $150. Getting a larger loan will not improve your credit faster. The on-time installment loan payments help your credit. Monitor your credit score and look at the big picture. Do not get discouraged if it dips five points in a week if it has gone up 24 points in the past month. After three to six months, depending on the credit bureau you are looking at, you should see a positive trend, meaning your credit is rising month-over-month.
Bad credit loans are a win-win situation for everyone involved. There is no risk involved for the lenders, and the borrowers can create a credit history or repair bad credit. Good credit is crucial for everything from renting an apartment, condo or house to financing a mortgage or getting a government job or job in the financial sector. These loans charge little interest and while building your credit every month, they are also earning interest like a savings account. In fact, they are kept in an account you cannot touch until the loan is paid off in full or you decide to end the arrangement. If you end early, you get to keep whatever principal you have paid in plus accrued interest, although you forfeit the last 90 days of interest. Search for local credit unions or community banks first as they usually have lower interest rates and no administrative fee. Then, check for CDFIs and online lenders. Whatever you do, make sure you make every payment on time, every time, and never be more than 30 days late or else your credit will suffer. Monitor your credit, but do not sweat small changes. Look for an overall positive trend after three to six months.