A personal loan is a great option for an individual who needs a bit of financial help. However, their accessibility relies heavily on credit.
Personal loans for bad credit are not easy to obtain because they create a great deal of risk for the lender. And, they may not always be the ideal option for the borrower either.
If your credit is not the best, but you want or need to access funds, there are a few things to think about before you jump into trying to apply for a personal loan.
Personal loans are a type of unsecured loan. As such, most personal loans carry a significant amount of risk with them for the lender.
For example, if a person wishes to buy a home, the home works as collateral. If you do not make payments, the lender can force the sale of the home. The lender can get back some of what it invested.
However, this is not the case with a personal loan. There is no collateral, which means there is a significantly higher amount of risk.
This is why most lenders limit personal loans for bad credit. Only well-qualified candidates typically are offered these loans.
Take a closer look at a few key things that make the lender view a candidate as a good risk.
Having a steady income is essential. If you do not have a job you have been at for some time, it is harder for the lender to know if you will make payments on time.
Many times, employment is more important than other factors. However, just having a job is not enough.
You also need to bring in enough income. Specifically, your expense to income ratio is critical.
Are you making enough money to pay your existing expenses? Can you cover the new monthly loan payment, too? Lenders need to know you have the funds to pay your debt.
Your credit history paints an important picture for your lender. They can see your level of financial responsibility.
Do you make payments on time? Do you open new lines of credit and then exhaust them? Do you have a consistent history of making payments that are higher than the minimum amount due? All of these factors contribute to the amount of risk you present to your lender.
Many use credit scores as well. Credit scores provide insight into the overall creditworthiness of a borrower. If your credit score does not meet their specific goals, it may be more important to improve your score before you apply. Focus on making on-time payments and paying down as much debt as possible.
If you have poor credit, obtaining more credit does not necessarily help you to get out from under your struggles. Rather, it can create a worrisome situation for some borrowers.
With the new loan, you have even more obligations and further risks of potentially not making payments on time.
There are some situations in which personal loans for bad credit can be beneficial.
For example, a debt consolidation loan is one option. Your lender may agree to offer a new loan to you that you use to pay off your existing credit card or other unsecured debt.
Obtaining a personal loan for bad credit is only beneficial when…
If a debt consolidation loan could help you, a credit union may be the best bank for a personal loan.
Discuss how you plan to use the funds. In some cases, they may provide a loan to you if you meet other financial requirements, such as having steady employment. They may also be willing to do this if you have a co-signer on the loan who has better credit.
No matter if you have good or bad credit, making a wise decision about when to borrow via a personal loan is important.
Whenever possible, consider a secured loan, one backed by some type of collateral. When you do, you may qualify for lower interest rates and better flexibility than with a typical unsecured personal loan.
Also, think about the financial benefit to you of getting a personal loan. If the loan will help you increase home value, build income, or consolidate debt, be selective about it.
It’s a great time to get a personal loan when…
Good credit, poor credit – you can always better your financial picture.
Work to build up your credit as much as possible. Prove to the lender you are a good risk. And, then, work with a credit union. Some credit unions are the best banks for personal loans.
Be financially stringent when assessing your options – you should only get a personal loan if it is going to benefit you in the long term.
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