Personal loans for people with poor credit
According to the good folks at FICO, the credit scoring developer, approximately 25% of the US population qualifies as having poor or bad credit. For these people, borrowing money from a bank can be a time consuming and frustrating chore – if they can even qualify. Once a person’s credit dips below the 600 level, they are no longer considered a “prime borrower” to lenders and thus are considered a "high-risk borrower" and fall into the subprime category.
What is a loan for people with poor credit? Is it different than a payday loan or short-term cash advance?
To meet demand, the credit industry created more flexible and relaxed borrowing guidelines for people with no, limited, fair, poor and bad credit. The resulting loan, also called a payday loan or “cash advance”, is typically a short term unsecured personal loan with higher interest rates and fees. Advocates support these loans citing they are fast and relatively easy to obtain and can help people deal with life’s unexpected financial emergencies. Critics claim that people pay too much in fees and interest and risk spiraling further into debt if they can’t repay the loan on time and in full and/or borrow repeatedly (read about the “Hamster Wheel effect”).
How Do Payday Loans Work?
These unsecured loans work when a consumer (with less than “good” credit) agrees in a contract that they will repay the principal loan amount, plus and interest and fees, in short order – typically on or by their next payday. In most cases, a borrower needs to be employed with payroll records and have a checking account at a US bank. They pre-date a check when applying online and funds are then automatically withdrawn from their checking or savings account on the pay date.
All lenders are directed by law to disclose all the fees and interest penalties beforehand without any hidden conditions. Loans are not available in all states and borrowers should be sure to understand all terms including any fees or charges associated with late payments, the non-payment of a loan and the repeated use, renewal, and extension of any loan. The general borrowing range for this type of loan is $100 - $1000 USD. The Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (“CFPB”) are two federal consumer governmental agencies that oversee various aspects of the finance and credit markets.
Credit Cards for people with bad credit
Credit card companies also design credit cards for people with bad credit and no, or limited, credit history. Cards can be “secured cards”, “unsecured cards” and even “prepaid debit cards”. Most people think they simply can’t get a credit card with anything less than stellar or good credit - but they can. Some of the most well known credit card companies will guarantee approval and not require a credit check or employment. Of course, bad credit credit cards may carry higher interest rates, lower maximum credit limits, and require advance payments but that is the trade off a consumer accepts until they can better their credit score.
Many people use this type of credit card to rebuild credit - but an important life rule to remember is to never charge more than can be paid back by the due date. People should work to rebuild credit, increase their credit score, reduce debt and ultimately get a credit card with more attractive terms.
Improve and Build Your Credit Score
There are three main credit reporting agencies in the US. These three agencies compile data from vendors and credit providers and issue a credit score for individuals. People that pay their bills on time and have clean borrowing and payment records generally get a higher score and people that are not so diligent generally get a lower score. The three main credit reporting agencies are:
- Trans Union
How to Get Your Free Credit Report
By law, consumers are entitled to one free credit report from each of the three main credit reporting agencies. Consumers can also obtain a report from other online companies that can help monitor and repair credit and help with identity theft. Click here for more information on how to get your free credit report.
The Top 5 Pros and Cons to Borrowing Money with Bad, Poor or No Credit
Loans for people with poor credit histories were originally designed to help people get through financial hardship and emergency situations and including medical problems, car repairs, or other unforeseen issues. They were not designed to finance the purchase of a new pair of designer shoes, a big screen TV to watch the Super Bowl or a trip to Mexico! Here are our top five pros and cons when deciding on whether to borrow money using a loan when you have bad or no credit (read full article).
|Top Five "Pros"||Top Five"Cons"|
|1 Fast approval and fast cash||1 Fees & interest rates can be high|
|2 Online registration is easy||2 Can be more expensive if you don’t repay on time|
|3 No credit - Good credit||3 Avoiding the Hamster Wheel Effect of repeat borrowing|
|4 Loans are unsecured||4 Saving money can be harder|
|5 Secure information||5 You need to have a job|