What You Need to Know About Getting a Loan with Bad Credit

 

Can I get a loan with bad credit? This is a question any adult with a credit score below 650 has probably asked at some point or another, and answering it is not as straightforward as it might seem.

In one sense, the answer is simply “yes” — it is usually possible to get some kind of a loan even if you have a suboptimal credit score. But these are often subprime or short-term loans like those offered by payday lenders, which aren’t meant to fund the debt consolidation loans that can help you get back on track financially.

This means the real question is not so much “can I get a loan with bad credit” but “where can I get a loan with bad credit that won’t leave me worse off than before.” To answer it we will need to explore some of the ways bad credit impacts your ability to borrow, and the steps you can take to borrow responsibly even if you have bad credit.

Borrowing with Bad Credit

A credit rating is essentially a quantified assessment of your creditworthiness, a metric designed to show future lenders whether you are likely to repay your debts in full and on time. Based on your history of borrowing, a credit bureau will assign you a score between 300 and 900, and lenders can access this score to determine whether or not to clear you for a loan.

Typically, a credit score is made up of the following considerations, with each dimension weighted and taken into account:

  • Payment history (35%)
  • Amount owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

If your score is low, some lenders will simply refuse to extend you credit or a loan. Others will agree to the loan, but will charge a high rate of interest to compensate for the risk they are taking.

Unfortunately, this means that financially vulnerable people whose credit scores have fallen during times of difficulty and unemployment have a harder time accessing necessary capital than those who are financially comfortable. This is a problem, because being able to borrow money at affordable rates is one of the key things that can help people break out of a debt spiral.

Inability to access affordable credit due to a poor credit score can make otherwise straightforward financial procedures much more complicated. So, given all this, if I have bad credit, is it actually possible to get a loan that doesn’t charge exorbitant amounts in interest?

How Your Home Can Help You Borrow Responsibly

The best way to borrow responsibly is by taking out secured rather than unsecured debt, which means borrowing against an asset you already have.

The home equity loan is the most common form of secured debt available to homeowners. Home equity is the value a homeowner has built up in their property, and it can serve as collateral for a loan (if you want to calculate your home equity, simply subtract the amount you have left to pay on your mortgage from the current market value of your home).

Home equity loans, sometimes known as second mortgage loans due to the fact that they function as an additional mortgage, are one of the best ways to secure the credit necessary to cover everything from emergency repairs to debt consolidation loans. While interest rates on a second mortgage will be higher than on the original mortgage, they are still significantly lower than the other types of loans available to people with bad credit.

So, where can I get a loan with bad credit that won’t cost huge amounts of money? The best thing to do is contact a mortgage broker specializing in alternative mortgages to explore the options that exist for taking out a secured home equity loan or second mortgage at a reasonable interest rate.

The Importance of Debt Consolidation Loans

In the long term, your goal should be to rebuild your credit and get to a position where banks and other financial institutions are happy to extend you a line of credit. Doing this isn’t easy — some experts estimate it can take up to seven years to repair your credit score — but it is worth the effort, and the first step usually involves getting a debt consolidation loan.

Debt consolidation can help you get your credit rating back on track because it allows you to retire certain debts by replacing them with new ones. This will reduce your overall number of debt obligations, potentially decrease the interest rate you are paying, and establish manageable monthly payments for the new loan.

So how can I get a consolidation loan with bad credit? And how can I make sure I can handle my new monthly payments? The best debt consolidation loan is a secured loan backed by an asset, so a second mortgage loan or home equity loan is the best option here.

Again, working with a mortgage broker who specializes in debt consolidation loans for clients who have bad credit will help you keep a range of options open, and will help you find the lowest possible rate of interest.

There’s an old saying that being poor can get pretty expensive, and anyone who has struggled with bad credit knows how true this is. While the rich, or even the moderately well off, can leverage their existing assets to access cheap capital, working families find themselves saddled with high-interest debt through no fault of their own.

The good news for homeowners struggling with low credit scores is that a debt consolidation loan is still within reach thanks to home equity. If you want to chart a path toward a debt-free future, get in touch with Burke Financial to get help today.