Bad credit can make just about any financial issue more complicated — and getting a loan is rarely an exception — but it doesn’t have to be impossible. Here are three things you can do to help improve the process.
1. Know Your Credit Situation
The first step to getting a small loan with bad credit is to become informed. Knowing your credit score and credit history before you start the application process will prevent any unpleasant surprises such as being disqualified because of an incorrect balance or outdated account on your credit report. Many lenders will also have a minimum credit score, though those specializing in subprime borrowers will be more lenient.
Being knowledgeable about your situation will also make it easier to identify a good offer when you find one. Your subprime score does not mean you need to take the first offer you see, nor does it mean you can’t possibly qualify for something better. Know what your options are before entering any particular agreement.
2. Have a Steady Income
In addition to your credit report, a lender will usually look at your employment status. Subprime lenders, in particular, need to take some steps to mitigate their risks, so you’ll likely need to fulfill certain work requirements to qualify for your small loan.
Qualifications can include verifying that you meet a minimum monthly income level and demonstrating work history of a certain duration. Requirements will vary by lender and loan amount, so shopping around may get you better results if your first attempt doesn’t succeed. Most programs will also require that you have at least a basic checking account.
3. Use a Lending Network
Traditionally, borrowers needed to call or visit each bank or lender individually to get an idea of the various rates available on the market. Today, there are a number of lending networks available that make the process of finding the best rate much easier.
Lending networks allow borrowers to receive offers from multiple lenders at once, often after filling out a single form, and compare the available rates quickly and easily. For borrowers with specific qualifications, including bad credit, lending networks can be the easiest way to get the best options.
Small “Installment Loans” for Bad Credit
While specific payment plans will vary depending on the lender, you’ll generally either have a short-term loan or an installment loan. Short-term loans, including advances and payday loans, usually have terms lasting a week to a couple months. With most short-term loans, your entire loan — plus interest and fees — will be due on the specified due date, and late payments will come with hefty fees.
Installment loans are repaid over several payments, with payments and due dates set according to a prearranged schedule (often monthly). Installment loans are a good fit for those who need a larger loan or can’t pay back the entire amount right away.
The following lender networks offer installment loans, among other loan types. The loans offered to you will be largely based on your application criteria.
Short-term loans tend to have higher interest rates than those for installment loans and because the entire loan is due at once, the payment can be high. Payments on installment loans can be more affordable, but the loans last much longer; you may end up paying more total interest on an installment loan in the long run.
Small “Unsecured Loans” for Bad Credit
There are two types of debt you’ll see most often: secured and unsecured. A secured debt is one for which the lender has some sort of security that the loan will be paid off, in the form of collateral. Loans for property, such as auto loans and home mortgage loans, are considered secured debts because the lender has a way to recuperate some of the loss (i.e., taking your car or house) if you can’t make your payments.
On the other hand, an unsecured debt is one given based on the word — and creditworthiness — of the borrower. Personal loans and credit cards are both generally considered to be unsecured debts because the lender has no way of securing, or guaranteeing, that the debts will be paid. Unsecured debts are thus riskier for the lender than secured debts, and will usually carry much higher interest rates.
An unsecured loan may not involve collateral that the bank can repossess, but lenders do have options if you default on your loan, including taking you to court. Make sure to pay your loan on time, in full, to avoid any nasty repercussions.
Small “Bank Loans” for Bad Credit
Typically considered to be hard to get and a lot of work, bank loans are quickly losing popularity in favor of loans from online lenders. More online lenders are starting up every day, and the increased convenience (and decreased anxiety) of applying for a loan online is quickly making online lenders the option of choice for many subprime borrowers.
Online lenders will often have better deals than banks, as the lack of overhead (no costs associated with opening branches all over the country) means they can charge lower fees and interest rates. Subprime borrowers will see less advantage when it comes to interest rates, but online lending networks can help you find the best offer.
Depending on the type of business you’ve formed, your personal credit history may be impacting your ability to get a business loan. Small business loans can be even more difficult to get than other loan types, with only about 27% of all applicants actually getting a business loan, according to the Small Business Association.
If you have been repeatedly denied a small business loan due to your poor credit score, you may want to consider applying for a credit card. A number of business credit cards are available for consumers with credit scores in the mid-prime range, typically a score above 640. Business credit cards can have limits into the thousands, and may be easier to get than a traditional business loan.
If your credit is too low to qualify for a business-specific credit card, you can also try applying for a credit card aimed at individuals with bad credit. Keep in mind that interest rates may be higher than with other cards, and the spending limits will likely be lower than those offered with business cards.
There are also other — less traditional — funding options, such as crowdfunding (think companies like Kickstarter) and peer-to-peer lending, which allows small business owners to raise capital through user investment. Many of these sources will come with minimum funding or revenue requirements, and interest rates can be all over the place; do your homework before you apply.
Use Your Small Loan Wisely
Small loans can be a huge help when you need a hand with a sudden or unmanageable expense — or just need to keep the lights on — but they should be used with caution. A loan that is paid back in full, and on time, can be a boon to your bad (or growing) credit report. At the same time, making late payments, or missing payments entirely, can make bad matters worse. Always keep an eye on your payments and due dates to make sure you get the most out of your small loan.