There are many types of personal loans available, but for someone with a low credit score, the offerings may seem few and far between. Online loans are increasingly popular, and can be an appropriate option for some customers.
Different websites offer listing, which will compare various offerings and explain the pros and cons of each one. Knowing this will give you more information if you choose to check your rates.
When considering an online loan, it's also worth asking some more basic questions about credit scores, personal loans, and how to decide if a given loan is right for a particular circumstance.
Where Does A Credit Score Come From?
What is a credit score, and where did the idea come from? While many people looking for an online loan may have more pressing concerns in mind than a history lesson, it's worth looking at the origin of the phenomenon to better understand today's financial landscape.
Credit scores have their origins in the nineteenth century. Before credit cards, your ‘credit' was more or less your ability to get something at the local store on the promise you'd pay for it later. In a small community, it's easy to imagine that people who had money to lend or goods to sell, such as banks and shopkeepers, could sort out those people who paid their debts from those who didn't without too much trouble. In the United States, particularly after the Civil War, people began to move around a lot more, and that system became unworkable.
In Brooklyn in 1869, two brothers, Herman and Conrad Sells, started something called a credit bureau. They collected a list of neighborhood customers and listed how creditworthy they were in a book (they used letter grades at the time) and met with a lot of success. There came to be thousands of such bureaus over the next hundred years, and their own was bought out by the Retail Credit Company, later renamed Equifax. That firm, one of the three main CRAs or credit reporting agencies, may be best known for being hacked in 2017, exposing the private information of more than 150 million people, most in the US, as well as some in Canada and the UK.
How Do Credit Scores Work?
Today, when people say ‘credit score,' they mean your FICO score, a number between 300 and 850 that represents the same thing that the letter grades in the Sells brothers' books did. Today, there is an algorithm involved that makes it hard to say quite how the number is arrived at with total precision.
Of course, there are some pertinent aspects that go into that number. For example, this is the breakdown of what makes it up according to FICO:
- Payment history (35%) –This refers to whether or not you have paid on time in the past.
- Current debt (30%) – This refers to how much you owe now, although it's important to remember that having debt on its own does not mean you will be labeled a high-risk for lenders.
- Length of credit (15%) – This pertains to how long the credit accounts in your name have been established.
- New credit (10%) – This is a category that watches out for multiple recent accounts being opened, since this is deemed risky especially for those without a long credit history.
- Types of credit (10%) – It references the mix of debt you have, including credit cards, mortgages, and other types of credit.
The reporting agencies do not specify how these categories exactly correspond to the credit scores they provide to lenders, but there are some things that can help improve your credit score in the long term.
Experts tend to agree that you should try to use 30% or less of your available credit (so, don't keep a balance of more than USD$6,000 if you have credit cards with limits that add up to USD$20,000). If you are late on a payment, it would be best to make sure it happens once and then not again. The longer ago an isolated late payment is, the less of an impact it has on your credit score.
What Is A Personal Loan?
While there are many types of personal loan available, one easy rule of thumb is that a personal loan usually does not have any collateral behind it. That lack of collateral, an asset that can be seized if the loan is not paid back, is why personal loans are also called ‘signature' or unsecured loans.
A personal loan will usually look at your credit history and income to determine your eligibility. One of the benefits of personal loans offered by online lenders, especially for people with bad credit, is that they may rely on different methods of assessing credit. Whether you pay your rent and your utility bills on time can be used to predict your ability to pay back a loan, for example.
The three main types of personal loans include:
- Standard personal loans offered by banks and credit unions for which you can apply in person or online
- Online lenders that often use alternative credit models with an easy application
- Specialized lenders who may work with a service provider, like a dental clinic
You can also spend the money in a personal loan in a wide variety of ways. Some common examples of why people take out personal loans include:
- Debt Consolidation – For some people, the debt they have on credit cards could be paid off more quickly at a lower interest rate by consolidating it into a personal loan.
- Smaller Home Improvements – While a home equity loan can be a good choice for a large home improvement project that will increase the home's value, a personal loan can work well for something smaller and requires much less work on the application.
- Expensive Purchase – This is pretty straightforward: you have an expensive purchase, but you don't have the cash on hand. A personal loan could solve the problem in the right circumstances.
- Emergencies – In the face of medical emergency or another sudden expense that goes beyond whatever savings you have, a personal loan might be a viable option
- Investment In Yourself – While personal loans sometimes won't allow you to spend them on education, many can be used to start a business or learn a new skill you need to change careers
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What Is A Bad Credit Loan?
For the purpose of getting a loan, bad credit is what FICO says it is: a score of 579 or lower. In such a case, loans will have higher interest rates, and they may also have more fees than a loan for someone with a higher credit score.
Personal loans for someone with bad credit at multiple online lenders start at USD$1000 or USD$2000, so that may be enough depending on your needs. It is worth being cautious about providers who say they approve everyone, and you should be aware of how high the interest rate is for the loan in question. Taking out a loan to deal with a current emergency, only to wind up in a worse situation later on isn't a good solution.
Some websites have assembled useful lists that offer the pros and cons of different personal loans. This one is updated regularly and provides reviews of a wide range of providers, along with tips useful to anyone looking for a loan or with an interest in personal finance.
One approach to applying for personal loans with bad credit is to look at quotes from both online and local institutions, comparing at least three, then pick whichever deal is best. If you take this approach, make sure that these lenders perform what is called a ‘soft inquiry' of your credit to help make sure that investigating your offers does not hurt your credit score.
If you are having trouble getting a loan with bad credit, you can consider several options that may make it possible for you to qualify. First, check your credit report to make sure there is not something inaccurate that is negatively impacting your score, making it harder for you to qualify than necessary.
Next, make a plan to pay down your debt and start executing it when you can. Lowering the ratio of your total debt to your income can help with future applications. Finally, consider asking someone to serve as a ‘co-borrower,' as the additional higher credit score and added income may well be enough to put you over the top.
Final Thoughts
This brief review of the history behind credit reporting, personal loans, and how the two intersect can be a starting point for your decision-making process; however, it can't be the end of it. If you are looking for a loan online with bad credit, it is worth remembering that, as with any financial decision, you need to understand your own circumstances and what makes the best sense for you. Talking to a CPA or other financial advisors before taking out a loan can be a big help as you explore all your options.
