People with bad credit used to despair about their chances of getting a loan, but those days may be over.
The marketplace for lending is so crowded with opportunities that it’s not only possible, but quite probable that you can borrow money, even with bad credit.
Especially if you have collateral.
That line was bold-faced for a reason. Collateral is a difference maker for anyone trying to borrow, but especially for someone with bad credit.
It is often the reason a person with bad credit gets a “good loan” – one with an interest rate low enough that it’s actually affordable – or must settle for a high-interest loan that may put out an emergency financial fire, but whose payments could cripple your long-term economic health.
So where are all these loan opportunities for people with bad credit?
- Home equity loans
- Credit unions
- Peer-to-peer online lenders
- Family and/or friends
- Pawn shops
What Is the Definition of Bad Credit
Let’s start by seeing if you even belong in the bad credit category.
A subjective definition for bad credit could easily be that no one will give you a loan, but if you want a numbered measurement, check your FICO credit score. If it’s under 620, you officially have bad credit.
In 2017, 24% of American consumers had credit scores under 620, according Tommy Lee, principal scientist at FICO. About 90% of lenders use the FICO score as a measuring stick so if that’s the deciding factor in receiving a loan or being denied, you might want to start by improving your credit score before seeking a loan.
Home Equity Loans for People with Bad Credit
If you have equity in your home, that might be the easiest, and least expensive way to get a loan because lenders like a little collateral when they hand out a loan. You could even use this kind of low-interest loan to consolidate high interest credit card debt.
According to a 2016 study by the Urban Institute, people who own their home free-and-clear, have an average of $171,972 in home equity while those who still owe money on their house, have an average of $98,763 available. If you fall in either category, the positives of your equity can overcome the negatives of your bad credit.
To determine your home equity, find out its appraised market value and subtract how much you still owe on it. For example, if your home is appraised at $150,000 and you owe $100,000 on it, you have $50,000 of home equity. Generally speaking, you should be able to borrow 80% of the home equity, which comes to $40,000 ($50,000 x .80 = $40,000).
The best rate for home equity loans in the spring of 2018 was around 5.6%, but that would be for someone with good credit. For people with bad credit, the lenders will have to take into account your credit score, income, employment history and expenses to determine the interest rate, which very likely will be much higher.
It makes sense to go through with the loan if you’re borrowing money to upgrade your home, but it is very risky if you’re using it to eliminate unsecured debt like credit cards or medical bills. If you default on a home equity loan, you could lose your home. If you default on a credit card, there is considerable damage to your credit score, but you still have a home.
Credit Unions and Loans to People with Bad Credit
Credit unions are easy to join and make a lot of sense for people with bad credit. They are nonprofit organizations owned and run by their members, which means if they want to, it’s possible to expand the guidelines on loans to help out a member.
“Almost across the board, credit unions are going to be much more consumer friendly because our depositors and borrowers are our owners,” Mike Schenk, Vice President of Research and Policy Analysis at Credit Union National Association, said. “Credit unions stand apart as being able to go beyond traditional underwriting standards and be flexible in serving our customers.”
Rates and fees at credit unions for both secured and unsecured loans typically are lower than banks and much lower than online lenders. That doesn’t hurt their bottom line because as a nonprofit, there isn’t supposed to be one.
A 2016 study by Nerd Wallet said that the average rate online lenders charged someone with a credit score under 630 for a personal loan was 28.64%. The highest rate a national credit union can charge is 18%.
In January of 2018, credit unions were offering 60-month new car loans at 2.91% and home equity loans under 5% for people with very good credit scores.
Credit score is part of the qualification process, but credit unions tend to take a look at your whole financial picture before deciding what interest rate to attach to a loan.
Online Lenders for People with Bad Credit
Online lending – or Peer-2-Peer as it is often called – has become the biggest pool of opportunity for people with bad credit.
Lending sites have popped up all across the internet, many funded by investors willing to take a risk. The reward is a big payoff via high interest rates charged to the borrower.
If you have bad credit, you should expect to pay from 25% to 37% for an unsecured loan and a few percentage points less than that for a secured loan, meaning you have collateral. Some of the best-known players include Avant, Earnest, SoFi, Peerform, Lending Club and iLoan.
There are a couple of hybrid outfits catering to consumers with bad credit – OneMain Lending and Mariner – that operate out of brick-and-mortar buildings, but also allow you to do at least part of the process online.
OneMain has lower rates – 9.99% for secured loans, 17.59% for unsecured loans compared to Mariner’s lowest rate of 24% for secured or unsecured. Both top out at 36% and chances are, with bad credit, you’ll be closer to the top rate that the bottom.
Getting a rate quote is usually simple and fast with online lenders, but affording loans at this high an interest rate is difficult. The rate you get might not be any better than you get with your credit card.
Loans from Family or Friends
If you want to know what awkward feels like, ask a family member or friend for a loan. Don’t be afraid. It happens a lot and in nearly every case, both sides feel awkward about the conversation.
Lending Tree did a study in 2017 that found 75 percent of adults either borrowed or lent money to a family member. The average amount, according to the study, was just over $5,000.
That’s the good news. You can make it happen, though it happens a lot better if it’s done as a business deal. Both sides should sign a promissory note that details the amount, interest rate and length of repayment plan.
The bad news is that only 57% of the borrowed money ever gets repaid.
Neither side feels good about family/friends loans, but if each party treats it like a business, it could benefit both sides.
Pawn Shops as Lenders
Pawn shops aren’t just a place to buy unusual items, they also are a place anyone with bad credit can go for a short-term loan.
The interest rate for a loan – referred to as a “fee” by pawn shop owners – varies widely, depending on state law. It can be as low as 15% and soar up to 200% in some places. That’s not good, but it beats the 400% charge at payday loan and car title loan companies.
But remember that word “collateral” from the top of this article? Don’t bother walking in a pawn shop unless you have some with you.
Pawn shops offer collateral-based loans. You bring them something of value and if they like it, they will make you a loan. The loans generally are for 1-4 months and the amount you receive will be considerably less than the value of the item you brought to pawn.
But you will have a loan and thus be able to avoid costly emergency matters like rent eviction, utilities being shut off, car being repossessed, etc… until you can straighten out your finances for the long run.
Pawn shops give you a receipt for your property that includes the amount you owe to reclaim it and the date by which you must repay the loan. If you don’t meet the deadline, the pawn shop keeps the property and probably tries to sell the item to recover the loan amount.
They prefer to get paid back and, according to the National Pawnbrokers Association, 80% of their loans are repaid.