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Qualifying for a Loan with Bad Credit

By: Stephen Bishop Jr.
Published: November 2007

It is safe to assume that most of us have had run-ins with bad credit or debt at one point in time. It is also common knowledge that qualifying for a loan is much simpler for a person that has excellent credit rather than someone with bad credit. If you are currently one of the millions going through credit problems, there are options. Qualifying for a loan can be daunting, but it may ultimately help your credit and financial situation.

There are many different types of loans available to people that have bad credit. These loans include mortgage loans, payday loans, auto loans, and personal loans. A personal loan can be categorized as either a secured or unsecured. A secured personal loan is simply a loan given to a person backed by collateral, while an unsecured personal loan is supported by the borrower’s creditworthiness, income and other factors.

When attempting to qualify for a mortgage loan, borrowers are generally placed in one of two categories; prime and sub-prime. Generally, a FICO credit score below 620 will be considered sub-prime. Sub-prime borrowers can expect to pay higher interest rates on their mortgage. However, when it comes to qualifying for a mortgage loan with bad credit, many people choose to get pre-approved by their lender. Pre-approval for a home loan is done before the person has found the home that they want to purchase. The borrower must provide information concerning their credit score, income, employment, and assets to the lender before becoming pre-approved. The lender reviews this information and suggests the mortgage that is fit for the borrower. More importantly, being pre-approved for a home loan allows those with bad credit to know their maximum borrowing capacity. In return, the borrower will know exactly what their budget is when making an offer on a home.

Auto loans may be one of the easiest financing options for an individual with bad credit. An auto loan is considered a secured loan because the car is used as the collateral. Under the financial agreement, if the borrower is not able to make payments on the car, the lien holder (lender) can legally take possession of your vehicle. This is often called repo or repossession. Even someone with a prior bankruptcy can ride off in a new car. Of course, a person with bad credit will typically receive a rate much higher than someone with good credit. Whenever purchasing a car, you may want to consider getting a pre-approval from a lender first. This will give you some wiggle room to negotiate for a better rate. Also, paying in cash can be beneficial when trying to get the best price for the car.

A payday loan is typically a short-term loan used to cover unsuspected expenses and bills. Payday loans are also known as cash advance loans. Payday loans are quite easy to qualify for since credit checks are not involved. A person with bad credit can receive a cash advance just as easily as a person with excellent credit. Most cash advances use a post-dated check or electronic checking account as collateral. Therefore, a person getting a cash advance only needs proof of income and a banking account to qualify. Not only are payday loan stores located right around the corner, but they are also found online. If you are considering a payday loan it is very important to consider all the terms associated with the loan. Payday loans typically have very high interest rates when compared to other types of loans.

Personal loans are used for personal needs. If you have bad credit, it is important to know that there are solid, reputable lenders that cater to your personal borrowing needs. Some of the more common lenders are CitiFinancial and HFC/Beneficial. These lenders offer very competitive rates for those with bad credit. The first step to qualifying for a personal loan is to determine whether or not you will secure the loan with collateral. Many banks and credit unions will lend to a person with bad credit so long as the borrower has a savings account with the financial institution in which they are getting the loan. This type of loan is known as a secured savings loan. The great aspect of a secured savings loan is that approval is normally guaranteed. Some financial institutions will allow you to borrow up to 100 percent of your savings account balance. The amount that you borrow is backed by that same amount in your savings account. The borrowed amount is said to be “frozen.” As you pay off the debt, you gain access to the funds in your savings account once again. Other secured loans may require the borrower to use their home as collateral. Typically, qualifying for a secured loan is a much simpler process when compared to unsecured loans. In qualifying for an unsecured personal loan, your credit score and other income play major roles in determining the interest rate on the loan. You must first apply for the loan. Applications will require information regarding your financial status. The lender will then review the application as well as your credit score to judge the amount of risk that is involved in making the loan. A person with bad credit may need someone with better credit to co-sign for them. In this situation, if the borrower defaults on the loan, the co-signer is responsible for paying the loan.

If you are one of the many with bad credit, a loan can not only help your financial needs, but also can help improve your credit history. If you make your payments on time and completely pay off the loan, your credit score will increase. As your credit score increases, so will your ability to qualify for loans in the future.

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