Bad credit is a way to describe someone’s credit history as a borrower that has a high credit risk. A bad credit borrower is signaled by a low credit score. A borrower with a high credit score is an indicator of good credit. When creditors lending money to an individual with bad credit face a greater risk of the borrower defaulting than lending to individuals with good credit.
Ways to Obtain a Loan with Bad Credit
Home equity line of credit – Borrowers who have enough property equity may be able to get a low-interest, tax-deductible line of credit. By using home equity, it can put a borrower’s property at risk if the debt can’t be repaid. But if the borrower is diciplined about paying down an equity line and has reliable income, it’s an inexpensive option.
Peer to peer loans – Around since 2005, peer to peer or P2P lending is an online platform allowing borrowers to borrow from an individual rather than an institution. Growing in popularity, peer to peer loans can be a streamlined process and a benefit for borrowers who pay low interest rates and investors who earn high interest rates.
Credit unions – Similar to banks, credit unions are owned by their members, who typically have some commonality such as living in the same geographic area or working in the same industry. Credit unions are nonprofit organizations that pass along earnings to members in the form of low fees and high customer service.
Take a loan from family or friends – Borrowing from family or friends may be an option when borrowers have bad credit. The loan should be treated just like a business transaction with clear documentation and is legally recorded.
Use a co-signer – Someone who knows your bad credit situation and trusts that you will repay the debt may be willing to take a chance on you.
What are the problems borrowers can expect with Bad Credit?
Credit cards and loans with high interest rates – Lenders see borrowers with bad credit as riskier than applicants with good credit scores. Borrowers you pay for this risk by charging you a higher interest rate. Over time you’ll end up paying more in interest than you would if you have better credit and a better interest rate. The cost is higher with big credit card balances or major loans.
Credit and loan applications may not be approved – Because lendersmay think the borrower is a bad credit risk, they might not want to loan money With bad credit, you may find that your applications are being denied.
Approval for an apartment – Who knew that landlords check credit before allowing you to sign a lease? It’s true. Having bad credit can leave you homeless or close to it.
Security deposits on utilities – Utility companies – electricity, phone, and cable – check your credit as part of the application process. If you have a bad credit history, you may have to pay a security deposit to establish service in your name, even if you’ve always paid your utility bills on time. The security deposit will be charged upfront before you can establish service in your name.
You can’t get a cell phone contract – Yep, cell phone companies check your credit too. They contend that they’re extending a month of service to you, so they need to know how reliable your payments will be. If your credit’s bad, you may have to get a prepaid cell phone, a month-to-month contract where phones are typically more expensive, or go without one at all.
You might get denied for employment – Certain jobs, especially those in upper management or the finance industry, require you to have a good credit history. You can actually be turned down for a job because of negative items on your credit report, especially high debt amounts, bankruptcy, or outstanding bills.
Higher insurance premiums – Insurance companies check credit too. They argue that lower credit scores are linked to higher claims filed. Because of this theory, they check your credit and charge a higher premium to those with lower credit scores, regardless of the number of claims you’ve actually filed.
Calls from debt collectors – Bad credit itself doesn’t lead to debt collection calls. However, chances are if you have bad credit you also have some past due bills that debt collectors are pursuing.
Difficulty starting your own business – Many new businesses need banks loans to help fund their startup. A bad credit history can limit the amount you’re able to borrow to start a new business, even if you have the greatest idea and the data to prove it.
Difficulty purchasing a car – Banks check your credit before giving you a car loan. With bad credit, you might get denied or you might get approved with a high interest rate. Most of those “no credit check” car lots charge extremely high interest rates that make it difficult to make your monthly car payments.