Nobody wants to have poor credit, but sometimes life happens to the best of us. A poor credit rating can result from financial mismanagement, or it could also be caused by the difficulties we face in life – a career crisis, a serious disease, or a divorce. But how does a bad credit rating affect you? Poor credit can prevent you from qualifying for a personal or business loan should you need financial assistance.
The definition of bad credit varies depending on the lender. But generally, a credit score lower than 579 is considered “bad.” If you need funding, your options will be limited, but we’ve listed several loan options specifically for people with bad credit.
Personal Loans (Secured and Unsecured)
Personal loans can either be unsecured or secured. As the name suggests, secured loans need collateral, like properties or vehicles, that offsets the risk lenders take. This results in better rates and terms and higher loan limits since borrowers have a greater incentive to repay the loan on time. It’s also easier for borrowers with bad credit to qualify for a secured loan than an unsecured one. But there’s a catch: if you default on the loan, you risk losing your home, cars, or other personal collateral.
On the other hand, unsecured loans don’t need any collateral, but the terms of the loan are primarily based on your creditworthiness. This makes it harder for people with bad credit to qualify for unsecured loans. Since there’s no property or car to offset the risk, these loans often come with higher interest rates and lower loan limits. The upside is that you won’t risk losing your personal assets if you fall behind on dues.
Personal loans, whether secured or unsecured, are great tools to get you the funds you need. But it’s essential to weigh the pros and cons of each type of financing so you won’t put your assets at risk.
Payday loans are short-term loans for small amounts (usually around $500 or less) that are meant to be repaid with your next paycheck. These loans charge high rates in exchange for immediate funding, and if you can’t repay the loan on time, you could get into a vicious cycle of debt.
They’re great for bad credit borrowers because payday lenders don’t often run credit checks on applicants, making it easier for applicants to qualify than other lending options. A payday loan can solve urgent money problems during emergencies, but you need to weigh your options. Evaluate your business to see if you’re able to repay the loan on time. If not, then you’re better off with a different form of financing.
A cash advance is a short-term cash loan where you can borrow money against your credit card’s line of credit. The money you receive is paid out in cash and borrowed from your credit limit. Cash advances allow you to use your credit card to receive instant cash through a bank or ATM. If your credit card has a PIN, you can quickly get an advance from ATMs. If not, you can take your credit card to banks that offer cash advances through your card’s payment network, like Visa or Mastercard.
While cash advances are one of the fastest and most convenient ways to get money, the interest rates are usually higher than your card’s APR and higher than personal loans. The interest accrues immediately, which can put you in a precarious position.
Home Equity Loans
Home equity loans give you a lump sum of money upfront, which you can repay in fixed monthly installments. Your home serves as collateral for the loan, so lenders have the right to repossess your property if you fail to repay the loan. Since a home equity loan is a secured loan, the interest rates are usually lower compared to unsecured loans. The collateral also makes it easier for people with bad credit to qualify for home equity loans.
Home equity loans are best used for purchases that require a large amount of money upfront, such as debt consolidation, home improvement projects, and the like. You can apply for a home equity loan from banks and online lenders.
Getting a 500-dollar loan with bad credit is possible, but you’ll need to do a bit of legwork to determine the best financing option for you. Before signing anything, be sure to understand the loan’s terms, rates, and fees to get the most out of your financing.