The present economic situation has made a good credit score mandatory for people in need of a loan. An individual's credit score measures his credit worthiness. In the US, the 3 credit bureaus, viz., TransUnion, Experian, and Equifax collect and compile information on a person's credit history.
Each bureau maintains a credit report and provides scores based on the system created by Fair Isaac Corporation (FICO) in the year 1958. A good FICO score is now a must for obtaining a home loan. Gone are the days of sub-prime lending.
At present, a FICO score between 760 and 850 would mean an interest of 3.731% on a 15 year adjustable rate mortgage, while a FICO score greater than 740 would entitle a person to a 30-year mortgage with an interest rate of 4.487%. A large number of bank failures have resulted in banks and financial institutions enforcing strict lending laws.
In this situation, a person having less than satisfactory credit score will find it difficult to seek loans. Thankfully, there are a number of alternatives for such people, and they are mentioned here.
Payday Alternative Loans (PAL)
Banks and credit unions offer payday alternative loans for people with bad or no credit history. These loans, which are fully amortizing, are provided for 6 months to 1 year. The APR on such loans is around 22% for people with points below 570. For points between 571 and 620, the APR is around 18%, while for people with scores over 620, APR is 15%.
A credit score below 620 is generally not healthy. Hence, it is obvious that these loans have been designed for people who need credit, but have a poor credit scores. There is no need for any collateral, and generally a person can borrow a maximum of USD 1000 and a minimum of USD 300.
Non-bank financial institutions provide payday loans. However, the interest rates on these loans is very high and banks and credit unions often consider payday loan providers as predatory institutions. PAL is definitely a better option as compared to payday loans.
Co-signed Unsecured Loans
An unsecured loan does not need any collateral, but a person is expected to have a good credit score. However, a person may be able to obtain an unsecured loan, despite having poor credit score, if he can get a friend or a relative with a stable income to co-sign.
Caution has to be exercised in case of these loans, since the co-signer will be liable to pay in case of default. A person may be able to improve his credit score, because of timely payments.
Savings Account Secured Loans
This a good option for people with poor credit having a savings account or a time account. They might be able to use these accounts as collateral and obtain a secured loan. Of course, this is possible only if their accounts are in good standing with the bank, despite having less than perfect credit scores.
This happens in case of a person who accidentally ruins his score by opting for too many departmental store credit cards, but never uses them, or cancels them after a few days of applying for the same. Seemingly harmless activities like these can ruin a person's credit score.
The reason such activities affect is because the FICO score has a component called credit utilization ratio, which is the ratio between the amount of debt and the amount of credit available. On canceling a credit card, credit availability falls and the credit utilization ratio goes up, thus pulling down the FICO score.
Bad Credit Loans/No Credit Personal Loans
They are generally unsecured and provided by non-bank financial institutions. The rate of interest on such loans can be as high as 19%. Recession might make these loans harder to come by. The borrower should be cautious while availing these loans, since he may be unable to repay the principal and the interest, and may end up further damaging the scores.
Debt consolidation is the process of replacing multiple loans with a single loan. This is for people with poor credit scores, and laden with debt. Such a person can try to approach a debt consolidation agency which may be willing to provide him with an unsecured loan at a lower fixed rate. The amount borrowed from the agency can be used to settle old debts.
This write up was meant to elaborate on the availability of a number of loans for people with poor credit. In fact, it may be possible for them to obtain a line of credit and improve their credit scores at the same time by applying for a secured credit card. A secured credit card, as the name suggests, is collateralized by a deposit made in the bank.
The bank provides the depositor with a credit card with a low credit limit. His limit increases if he makes regular payments on his card. The monthly payments, reported to bureaus, help in increasing a person's score. A person with poor scores thus, has access to a line of credit, and at the same time, has the opportunity to improve his credit score.