Getting someone or an organization for that matter to lend you money is always a difficult task because they are often worried that you might fail to pay them. It is more difficult of you want a personal loan for poor credit. While the process of getting such a loan is always hectic, it is not impossible. In fact, many companies have been formed to address people like you. This article will explain what you can do to get a loan with poor credit score.
What is a Poor Credit Score?
Whenever you borrow money in a bank, [credit card](https://fififinance.com/us/credit-cards), an online lender or a credit union, the companies submit this data to credit companies like TransUnion, Experian, and Equifax. Whenever you make a payment, this information is recorded by these companies. The same happens when you default. All this data is used to create your credit score, which is later used by financial institutions that you go to borrow money to. In general, the credit scores are usually defined as follows.
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Excellent: 800-850
To create your credit score, these companies consider multiple factors. In general, the following factors play an important role in determining your credit score.
- Payment history (35%)
- Current debt balances (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
The implication of the credit scoring system is that lenders will be always open to give you money at favorable rates if you have an excellent credit score. If your score is below 580, you will have a challenge getting money from the mainstream lenders like banks and credit cards. Still, there are a number of options that you can use to get financing.
We strongly advise you against going for payday loans. While payday loan companies will be happy to lend you money, there is always a catch. Some of these companies will charge you more than 400% interest rates for a small short-term loan. They will give you nightmares you will want to forget.
Consider Credit Unions
A credit union is a non-profit organization that is owned and controlled by the members. They are operated on the principle of helping the members by providing them with credit at competitive interest rates. As such, their goal is to not maximize profits but to serve the members. In the US, these unions are incorporated and serve under a state credit union law and are tax exempt. In addition, their interest rates are capped at 18%. Therefore, while the unions check the credit score of the borrower, it is easy to get a personal loan for poor credit from them. This is more so if it is a credit union in which you are a member.
Consider a Secured Loan
A secured loan is one which has a collateral. This collateral could be a house, car, or any other hard asset. Even when you have a poor credit score, financial companies will always give you money, when you have a collateral. While this is a good option to get such a loan, it comes with a risk. In case of an unsecured loan, the biggest risk you have is being listed in a credit company like TransUnion. In the case of a secured loan, the risk is that your collateral will be taken if you default. So, in case of a home equity loan, you risk losing your home.
A relatively easy method is to use the many online lenders like SoFi, Upstart, Lending Club, and Prosper that have come up. These companies aim to disrupt the lending business and some will always be open to giving you a loan if you have a weak credit score. For example, Upstart is built on the model that you are more than the credit score. As such, they look at other things such as your age, level of education, and what you need the funds for. For example, as a fresh Harvard Law School graduate with a weak credit score, the company could lend you money because it knows your potential in the marketplace.
Consider a Cosigner
A cosigner, also known as a guarantor is another option that you have. This is a person, with an account at the borrowing institution and one who knows you well. The risk to the cosigner is that if you don’t pay the loan, the money will be deducted from their accounts. This gives the lender a peace of mind that they can recover the funds.
Crypto Backed Loans
The emergence of Bitcoin and other cryptocurrencies has to new types of lenders who don’t look at your credit score. This is simply because in a crypto backed loan, your crypto will be used a collateral as in a traditional secured loan.
Key Takeaway: How to Get Personal Loan with Poor Credit
The takeaway is that all is not lost when you have a poor credit score. In fact, there are many options available to you. As you borrow, your goal should be to improve your score. As such, you should always pay back the money on time. In addition, you should avoid the predatory lenders, who are known to charge interest rates of more than 400%.