When you have bad credit, it is quite challenging to obtain an unsecured loan. At the same time, you may have an urgent need for quick cash in order to pay for car or home repairs or the school fees of your children.
If you cannot place an asset as collateral to get a secured loan, what can you do?
You can get an unsecured loan for people with bad credit. You just need to look at the different alternatives and pick the best one for you.
Know Where You Stand
You should try to see if you can go without taking out an unsecured loan. This is because these credit products traditionally have some of the highest interest rates. If you can place any kind of asset as collateral, you may be able to get a secured loan with lower interest rate. The asset does not necessarily have to be your house; it can be any other asset of value.
One option is to use your car as collateral. If you have paid back a considerable portion of your car loan, you may be able to obtain a car title loan. In this case, you place the equity which you own in the vehicle as collateral.
That way, you can secure a sufficient amount of cash at a lower interest rate and pay lower monthly instalments.
You need to assess the risk carefully
If you fail to repay the loan, you can lose your car. This, in turn, can have serious implications on your daily life and on your work as well. If you cannot go to work, you will not be able to earn income and this will have a huge negative impact on your finances.
There are other assets which you may place as collateral. Some lenders accept investment portfolios and instruments. There are those who work with smaller physical assets of high value as well.
Just make sure that the lender who you will work with is registered and adheres to the responsible lending policy.
Borrowing with a Co-Signer
You will have the best chances of getting an unsecured loan with bad credit if you apply together with a co-signer. You apply jointly and share the responsibility for repaying the loan.
This means that if you fail to repay the loan, the co-signer will have to do it. The co-signer must be a person with sufficiently high income and low debt-to-income ratio and with good credit history.
Getting a co-signer is not easy, however. This is because this person will assume a very high risk. They will have to repay the loan if you are unable to do so irrespective of the reason. Even if you get injured or ill and you are unable to work, the co-signer will still be responsible for the repayment.
The repayment of your loan will reduce the disposable income of the person and increase their debt-to-income ratio. In this way, they can get into debt and become unable to qualify for a loan themselves. You have to take these factors into account when considering the use of a co-signer.
Specially Designed Loans
There are lenders specialising in the provision of unsecured loans to borrowers with bad credit. These financial companies typically have very low qualifying criteria. At the same time, their loans tend to be quite expensive.
It is possible for the interest amount and fees to exceed the loan amount. Such highly expensive credit products should be avoided.
Many of these companies focus on the so called predatory lending, also known as loan sharks. Their target group consists of people with bad credit who have been rejected by many lenders and are desperately looking for a loan. If you deal with such a lender, you will not get much flexibility or room for negotiation.
If the loan is too expensive for you to repay, you may end up in a worse situation than the one you are in now.
You should work only with registered credit providers with excellent reputation.
Choosing a Loan
In addition to applying the affordability criteria, you have to consider whether and how the new loan will affect your credit record.
You should try to use a loan which will be reported to the credit bureaus. That way, if you repay it promptly, your credit will improve and you will be able to borrow more money more affordably in the future.
The choice of lender is extremely important as well.
You should focus on registered lenders only
You can also consider special programmes run by the government or the local authorities which are designed to help people with limited means.
The payday loans are always an option, but you have to be absolutely certain that you will be able to pay the high cost of borrowing.