The alternative options for obtaining loans with bad credit
Borrowing with bad credit can be a challenge. Not only is it harder to get approved by a traditional lender, but you may also have to pay more in the form of a higher interest rate.
You may have heard that private loans are a good alternative to traditional loans, and in some cases, that’s true. Understanding where and how to borrow with bad credit can help you safely secure the funds you need from the right private lender.
Basics of Private Loans
As the name suggests, these are loans that are obtained from a private lender. They fall under one of two categories:
- Loans from non-institutional lenders (i.e., not a bank or credit union)
- Private student loans that do not come from the government
Like traditional lenders, private lenders offer a variety of loans for personal and business use. But since these lenders generally do not have to adhere to the same high regulatory standards that traditional lenders do, they tend to provide an easier way to qualify for those with bad or insufficient credit (with less paperwork involved). In some cases, they can even offer more flexible and accommodating loan terms (shorter repayment periods, for example).
Note: You may be ready to borrow from anywhere except a bank, but don’t rule out local community banks and credit unions. These smaller institutions may be willing to lend when you have bad credit. Instead of facing a strict set of rules, talk to the lender to discuss your options. A traditional loan from a bank or credit union is much better than turning to a predatory lender who charges exorbitant interest rates and fees.
Obtaining Private Student Loans
If you are borrowing for education, there are two main types of loans: federal loans provided by the government and private loans from non-federal lenders, including banks and credit unions or government agencies.
Federal loans are your best option if you have bad credit because they do not require a credit check (except for PLUS loans) and offer fixed interest rates and income-driven repayment plans. It is usually wise to exhaust those sources before resorting to private student loans. However, there are limits on the amount you can borrow each academic year and over the duration of your studies. If you need more money and wish to choose between a fixed and variable interest rate, you may be able to obtain that through a private loan.
Banks and Other Financial Institutions
Most students have little to no income or credit history, making it difficult to show the bank that you have the ability to repay a student loan. However, you may have luck obtaining a private loan from a community bank or credit union, or a financial services company.
To get approved from a private lender, you will likely need to apply directly through the bank or other financial institution and undergo a credit check. If your credit reports are inconsistent, you may need to apply for a loan with someone else who has a more stable financial situation (who bears all the risks associated with borrowing with you) to increase your chances of loan approval.
Note: Student loans are considered easy to obtain but difficult to repay. Borrow as little as possible and continue to consider how to repay those loans after graduation.
Government Agencies
These are student loans from state-related institutions or government-affiliated institutions. The benefits of the loans vary by loan, but may include low interest rates, deferred interest accumulation, and a grace period before repayment begins. Additionally, some of these loans may be distributed directly by the school.
Typically
what you will need to apply directly through the government agency that offers the loan. In addition to filling out an application, you may be asked to prove your legal status and financial needs (for need-based loans).
Obtaining Loans from Non-Institutional Lenders
If your local bank or credit union is hesitant to grant you a loan, there are many alternative lenders available.
Peer-to-Peer (P2P) Lenders
P2P lenders like Lending Club and Prosper match borrowers with investors through an online platform. They offer personal loans (such as debt consolidation or car purchases) and business loans. Additionally, they handle all aspects of the loan process so that investors and borrowers do not need to interact directly.
P2P lenders make it easy to borrow, even with some blemishes on your credit report. For example, while LendingClub typically requires a minimum FICO score of 580, which may be a low score due to past credit mistakes. Furthermore, these private lenders can often help you find a lower interest rate than a traditional lender.
To obtain a personal loan from a P2P lender, you will need to undergo a credit check (which may trigger a hard inquiry that temporarily affects your credit), provide background information, and verify your income.
Individuals
These are loans you take from people you know. They could be friends or family members who have extra cash and are willing to extend a personal or business loan to you.
One benefit of a family loan (or a loan from friends) is that the person with poor credit often can secure a lower interest rate, shorter or longer repayment terms than banks would offer, and the ability to pause or reduce payments temporarily during a financial emergency.
To avoid misunderstandings that could harm your personal relationship with the lender, start with a detailed and honest conversation that clearly outlines the expectations surrounding the loan. Then, get a formal loan agreement that includes the amount borrowed, repayment terms, interest costs, and using a collateral or third-party service that reports payments to credit bureaus. Reporting payments to credit bureaus can help you rebuild your credit, giving you more financing options in the future.
Private Mortgages or Mortgage Lenders
Mortgage companies and mortgage brokers, along with private lenders specializing in real estate, offer loans for homes and properties for those with poor credit.
Real estate investors who are buying for the first time or who regularly buy and sell homes (and thus need large loans often) especially benefit from working with these private money lenders.
You will typically also need to undergo a credit check and verify your income to obtain one of these loans, but these private lenders may be willing to give you a loan for a riskier project (like flipping a house, for example) even with irregular income and poor credit if they believe it will be profitable.
Note: Before you apply, sign an agreement, or take any money, make sure you are working with a reputable and affordable lender. It is easy to have your identity stolen online or become a victim of an upfront loan scam that forces you to pay fees before receiving a loan. Lenders that promise to work with borrowers who have bad credit are often expensive as well.
Frequently Asked Questions (FAQs)
How can I get a mortgage loan with bad credit?
It is possible to obtain a mortgage loan with bad credit, and there are many options you can explore. In addition to private lenders, you can consider government loans such as FHA, VA, or USDA loans. Each of these options has unique requirements, but you can often qualify with a lower credit score. You can also try applying for a conventional loan with someone who is applying for the loan with you and has better credit than you.
Are
Can I get a large loan with bad credit?
The size of the loan you can obtain will depend on several factors, not just your credit score. It depends on the type of loan, your income, the collateral you use to secure the loan, and more.
Was this page helpful?
Thank you for your feedback!
Sources:
Experian. “Bad Credit? Here’s How to Qualify for a Loan.”
Pacific Private Money Inc. “Your Guide to Private Lenders: Should You Work with One?”
Federal Student Aid. “When It Comes to Paying for College, Career School, or Graduate School, Federal Student Loans Can Offer Several Advantages Over Private Student Loans.”
Federal Trade Commission. “Predatory Lending Practices in the Subprime Industry,” Page 2.
Federal Student Aid. “The U.S. Department of Education Offers Low-Interest Loans to Eligible Students to Help Cover the Cost of College or Career School.”
Sallie Mae. “Compare Federal vs Private Loans.”
University of California Merced. “Types of Loans.”
University of California Merced. “Dream Loan.”
Experian. “What Is an Unsecured Personal Loan?”
Metro Government of Nashville and Davidson County Tennessee. “Home Equity Conversion Mortgages ‘Reverse Mortgages,’” Page 1.
Oportun. “Partner With Us Today to Build a Better Tomorrow.”
The Associates Home Loan of Florida, Inc. “The Complete Guide to Private Mortgage Loans.”
Federal Trade Commission. “Advance-Fee Loans.”
New York Department of Financial Services. “Predatory Loans and Loan Scams,” Accessed Sept. 28, 2020.
Source: https://www.thebalancemoney.com/how-to-get-a-private-loan-with-bad-credit-315574
Leave a Reply