When it comes to personal loans, there are two types you can apply for: secured and unsecured loans. However, if you’re having trouble qualifying for a personal loan, consider other loans for bad credit.
Secured & Unsecured Bad Credit Personal Loans
Traditional personal loans can either be secured or unsecured. Secured loans require you to provide something of value (also known as collateral), such as your car, savings account or home, to back (or secure) the loan. The lender can repossess the collateral if you fall behind on payments or default. This makes them less risky to a lender, which also means they tend to come with more favorable terms, like lower interest rates, and fewer qualification requirements.
Unsecured loans, on the other hand, are the more common of the two and don’t require any collateral. Because these loans don’t require collateral and therefore pose more risk to lenders, they typically come with more qualification requirements and higher interest rates. The loans on this list are all unsecured personal loans.
Student Loans for Bad Credit
If you’re trying to cover higher education expenses, a student loan for bad credit is likely the direction you want to look. Although private student loans typically require good credit, borrowers with bad credit can take out federal student loans, which don’t require a credit check. Federal loans also come with the most flexible repayment terms, including forgiveness if you work in public service or choose certain repayment plans.
Auto Loans for Bad Credit
An auto loan is a secured loan that uses your car as collateral, which means the lender can repossess your car if you fall behind on payments or default.
Similar to personal loans, auto loan qualification requirements vary for each lender and dealership. While we recommend a minimum credit score of 670 to receive the most favorable terms, you can still qualify for an auto loan with a lower score as long as you meet the debt-to-income (DTI) requirements and bring a larger down payment.
Payday Loans for Bad Credit
Payday loans are short-term, small-dollar loans (usually up to $500) that you repay once you receive your next paycheck, typically two to four weeks after you take out the loan. Many lenders don’t require a credit check, which is often enticing for people with bad credit. However, don’t get your hopes up. Payday loans come with a ton of their own risks and sky-high fees. Consider other alternatives first, like personal loans or borrowing money from friends and family.
Home Equity Loans & HELOCs for Bad Credit
If you have enough equity in your home—your home’s current market value minus your remaining mortgage balance—you may be able to get a home equity loan or home equity line of credit (HELOC). Both let you draw against your home, which means your home secures the transaction and the lender can repossess it if you fail to repay. However, home equity loans are disbursed as lump-sum amounts while HELOCs limit you to withdraw funds on an as-needed basis.
But it’s unlikely borrowers with bad credit scores can qualify for these loans. Most traditional lenders require minimum scores between 600 and 620. There might be a specialty lender or credit union that will make an exception, but it’s not common. People with scores less than 600 would have to go through hard money lenders, such as private investors or companies, not a bank. While hard money lenders are more flexible, they’re typically a more expensive route.
How a Diligent Borrower Should Deal With a Bad Credit Report ?
Consider the case of a diligent borrower who had taken a home loan from a premier private bank. The gentleman prepaid his loan a few years before its 15-year tenure. Given his excellent track record, the bank voluntarily gave him a waiver on the last EMI.
Some years later, he approached another private bank for a personal loan. Later, his application was turned down without assigning any reason. The man then approached the largest public sector (PSU) bank. Now he was told his loan approval had been held back provisionally.
On enquiring, he was informed that one EMI of his previous home loan was unpaid. Shocked, the man insisted he had repaid the loan in full and there was nothing pending. When he probed further to know the precise amount pending, the bank found this was nil.
The gentlemen then realized that the EMI waiver had not been properly reported by his previous bank and the system labelled him a defaulter as one months’ payment was shown outstanding. The PSU bank manager expressed inability to help and said it was best he approached the concerned credit bureau to rectify the anomaly.
Unfortunately, the credit bureau was only willing to update his record if he paid the fees for their report. Peeved, the man refused to pay for updating an erroneous record, which was not his fault. Fortunately, the issue was resolved when the PSU bank cleared his loan after he provided the NOC of the private home loan lender, indicating his dues were fully paid.
This example is to indicate periodic checks of your credit report could address anomalies, if they occur. If you fail to correct discrepancies and update your credit report in time, it could be troublesome when an urgent loan is required.
- What are the documents I will have to submit in order to apply for a bad credit loan?
- PAN Card
- Passport/Aadhaar Card
- Salary account statement for the last two months
- Salary slips for the last two months
- Passport size photographs
- Copy of rental agreement if you reside in a rented house