Having a low credit score isn’t the end of the world. While it can make financial choices more complex and expensive, people with “bad” credit (generally, a FICO score below 630) do have options. Taking advantage of them can often have the added benefit of eventually boosting your credit score as a reward for sound financial behavior.
Take loans, for instance. People with low credit scores often think there’s no point in even applying for a personal loan because there’s little chance of getting approved. But that reasoning ignores one key recent change -- the rapid growth in available lenders, including those specializing in services for those with lower credit scores.
Here’s a quick look at different options for getting a loan if you have a low credit score (do you know your credit score? If not, take a quick detour from this article and get your credit score 100% free by signing up for MoneyLion’s free credit monitoring service, or if you’re a MoneyLion member already, sign up after logging in).
Who you gonna call?
Make no mistake – the lower your credit score, the more likely that you’ll pay a higher interest rate on any loan you can get. That’s because your low credit score signals to the bank that you’re a higher risk for paying the loan back in full. In an effort to protect the loan (and spread the pain from loans that don’t get paid back), banks charge higher interest rates.
That’s why one of the first questions to consider is whether you need an outside lender at all. For some people, a loan from a family member can be a viable option, and if your credit score is really low, it may be your only choice. Treat the transaction just as you would with a professional lender, with clearly drawn-out terms (life of the loan, interest rate) in a written document. And never make a loan agreement that could risk your future relationship with that person.
If you can’t find a family member to loan you money, another alternative would be ask them or someone else to co-sign a loan. But remember: the co-signer is agreeing to a legal obligation to pay back the loan on your behalf if you don’t repay. Here’s another case where you shouldn’t risk endangering a friendship or family relationship if you aren’t able to pay back your loan.
Trying an online lender
If those private options aren’t available, you can seek alternative lenders that offer the lowest rate you can get.
Credit unions, for example, can often be a better bet than traditional banks. And because they’re smaller and are nonprofit organizations that work for the benefit of their members, you may be able to get lower fees and more personal customer service. A search on Google for “credit union” and the name of your city or county should bring up credit unions available in your area.
Another option is an online peer to peer (P2P) lender. P2P works as an online platform that matches you with individual lenders that are real people, not banks. With a P2P lender, you might stand a better chance because unlike more traditional lenders they may look at more than just your low credit score to underwrite your loan.
Once P2P lenders knocked the door down as an alternative to banks, other online lending platforms such as MoneyLion, started to proliferate, using big data and different underwriting algorithms to better service loan customers.
One major plus with P2P and online lenders is that your credit score typically won’t be negatively impacted if you’re simply shopping around and want to see what loan terms you can get. You’ll usually complete a pre-application that involves a “soft” inquiry on your credit report that doesn’t impact your credit score. But keep in mind that once you formally apply for a loan, lenders will likely require a “hard” inquiry, which may impact your credit score if you have too many hard inquiries over short period of time.
Reducing credit card debt (also known as debt consolidation is far and away the top reason that people seek deals with P2P lenders. At the most popular sites, credit card payoffs make up 60 to 80 percent of all loans. Borrowers try to get loans that are significantly less than their credit card interest rates, saving them money over the course of the loan.
But interest rates can vary widely. Sometimes you can get low single-digit rates, but they can also climb above 30 percent depending on your credit score, income and the reason you want the loan. While these lenders aren’t faceless banks, they’re still investors who aren’t looking to lose money when people don’t pay back their loans.
At MoneyLion we look at more than just your credit score and our personal loans start at 7% interest rate. But remember that that doesn’t mean everyone will qualify for a loan… we look closely at each loan applicant’s overall financial picture to make sure that they’re able to afford a loan – which ultimately is a win win for both sides. We want to help our customers achieve financial wellness, and that includes avoiding too much debt that people might not be able to afford.
Avoid Payday Lenders
There’s one outlet that should almost always be avoided – payday loan providers. These lenders charge astronomical fees – sometimes as high as 400 percent – on short-term loans that average about two weeks, and often require no credit check at all. As badly as you might need cash, be extremely wary of falling into the never ending payday loan cycle. We will be covering payday loans in a future blog post, so stay tuned.
If you’re in the market for a loan and you have bad credit, you’ll need to do some homework to find both “private” options like friends and family, and newer online lenders that look at more than just credit scores that traditional lenders focus more on. Then compare different potential lenders, because platforms will have varying credit score minimums, loan terms and, most importantly, fees that can eat into your spending or debt-reduction capacity.