Based on the FICO Score 8 model, individuals with a score below 670 are typically considered to have bad credit. As a result, they often have difficulty qualifying for loans. Fortunately, there are some different types of loans for bad credit that may open up doors for these borrowers. Here’s a look at some of the options.
Secured Loans
Secured loans are lending products that involve some type of collateral. Auto loans and mortgages are classic examples, as the vehicle or house serves as collateral automatically. However, there are personal loans that involve collateral, too.
The benefit of getting a secured loan is that individuals with bad credit are considered less risky when collateral is involved. As a result, your odds of approval generally go up. Additionally, you might get more favorable interest rates or terms.
However, missing payments or becoming delinquent when you have a secured loan comes with a significant risk. If you violate the terms of the loan, the lender can move to seize the collateral. As a result, on-time payments are crucial not just for meeting the terms and protecting your credit score but also for ensuring that the collateral remains your property.
Installment Loans
Installment loans are a classic personal loan option. With an installment loan, you make set monthly payments for a specific period after receiving a lump sum from the lender. The main benefits are simplicity and predictability. Along with a set payment schedule, you know precisely when you’ll pay off what’s owed, creating a firm end date.
Usually, the drawback of installment loans that aren’t secured is that it’s potentially harder to qualify if you have bad credit. Additionally, interest rates and fees are usually higher, which can make the debt harder to shoulder. As a result, it’s critical to view the agreement before moving forward, ensuring you know how much you’re paying so you can determine if the loan is fair and affordable.
Co-Signed Loans
Co-signed loans are any type of loan where another party can serve as a co-signer. Co-signers essentially agree that they’re responsible for repayment if the primary borrower defaults. As a result, this reduces risk for the lender, which can increase your odds of approval.
In most cases, a family member of the primary borrower acts as a co-signer. However, friends are also potentially eligible to co-sign.
When there’s a co-signer, the lender will review the co-signer’s credit report and history as part of the application-processing procedure. Additionally, any loan activity is reported on the co-signer’s credit report and the primary borrower’s.
Generally, the greatest risk here is to the co-signer. If the primary borrower misses payments or defaults, it damages their credit score. Additionally, they’re legally responsible for the debt if the primary borrower falls through, which can be a significant financial burden.
Since co-signed loans can appear on credit reports, it may also limit the co-signer’s borrowing power. Lenders have to factor in that a co-signer may have to make those payments, so it could make the co-signer less eligible for financing they may need for their own purposes.
