Getting an Unsecured Loan With Bad Credit
It’s not easy to qualify for an unsecured loan with bad credit. However, things still come up—you may need money to consolidate debts, pay for a repair, or cover the tax bill. If you can’t pledge your home (or anything else) as collateral, is there any other way to borrow money? It is possible to get an unsecured loan, even when you have bad credit. Let’s review your options, and how attractive each one is.
Not Many Options, No Good Options
With bad credit, it's important to understand that your options are limited; there are no attractive solutions, but there might be acceptable solutions. If you really need money, you'll just have to pick the option that will be easiest to move on from once you’re back on your feet.
See if you can avoid using unsecured loans altogether. They tend to have the highest interest rates (there’s nothing for the bank to sell) and they are difficult to qualify for. Consider whether or not you have any collateral—even if it’s not equity in a home—that will help encourage lenders to hand over some cash.
People are often surprised to hear that they can use an automobile as collateral. If you have paid off a decent portion of your auto loan, it may be possible to borrow using a car title loan (try borrowing from your bank or credit union instead of a storefront title lender). These loans are not perfect, but they are sometimes better than payday loans and pawn shops.
Just keep in mind that you can lose your automobile if you fail to repay the loan. That may keep you from getting back and forth to work and earning an income, and your income is exactly what you need to get out of debt. Other assets that you own may also do the trick. Call a few banks and credit unions and find out what they can do for you (and what the risks are if you lose the asset) before you go with an unsecured loan.
Using a Co-Signer
If you’re going to get approved for an unsecured loan, but you have bad credit, it’ll probably only happen with the help of a co-signer. That person applies for the loan with you, promising to repay the loan if you fail to do so. Your co-signer needs to have good credit and sufficient income to pay off the loan.
While it may sound appealing to use a cosigner, keep in mind that your cosigner is taking a big risk. They won’t be able to borrow as much for themselves after they co-sign for you (because they are 100% responsible for your loan, even if you’re the one who’s planning to repay it).
If they want to buy a home, it may be impossible until your loan is paid off. Your co-signer is on the hook if anything happens and you’re unable to repay your loan. If you’re unemployed or injured (or worse), lenders will go after the co-signer for any remaining loan balance. If a co-signer can’t afford to pay off your loan, their credit will suffer.
Unsecured Loans for Borrowers with Bad Credit
If you really need to borrow money, there are a few options available. Some lenders specialize in offering unsecured loans to bad credit borrowers, but these should really be worst case scenario options because you can quickly get into trouble. In some cases, you’ll spend more on fees and interest than you ever borrowed.
“Predatory lending” is common when consumers have bad credit because these borrowers are desperate to get a loan and have been turned away by numerous lenders. Remember that you’re not in a position of power when working with bad credit lenders. They’ve got a lot more to gain from any transaction than you do, so be careful. Work only with reputable lenders, and keep an eye out for offers that are too good to be true.
It’s a good idea to make sure that any borrowing you do will help improve your credit. You may have bad credit today, but it can get better. Find out if your loan will be reported to the major credit reporting companies. If not, it won’t help you build credit, and you’ll be in the same boat the next time you want to borrow money.
How do you find a good lender when you have bad credit? Start by looking at legitimate lenders such as local banks and credit unions, as well as large well-known websites that refer you to lenders. If you don’t have any luck, payday loan outfits and pawn shops are always a possibility, but they’re generally a bad idea.