Losing a job, high medical bills, and just having poor budgeting skills unfortunately lead many to having a bad credit history that makes it difficult to get standard loans. However, many banks, and car dealerships especially, do offer bad credit history loans for anyone having trouble getting a loan approved. The advertisements for these loans can be enticing but there are some things to know before getting a loan with bad credit.
Getting a Loan With Bad Credit is Expensive
Before signing on the dotted line, you really want to understand the terms of the loan first. These loans are much more expensive than loans for people with good credit. This is because the interest rates tend to be much higher. For example, if someone with good credit takes out a $10,000 loan for five years, that person will pay about $200 a month and $1800 in interest over the life of the loan. The cost of that good loan is $1800. For someone taking out a bad credit loan, that interest rate can easily double. A $10,000 loan at 14% interest would require $233 a month and $3960 in interest. The bad credit loan in this case would cost $2160 more over the life of the loan.
Loans for Bad Credit Can Help Rebuild Your Credit
One positive aspect of loans for people with a bad credit history is that they can help you rebuild your credit. If you are now more financially secure and can afford the monthly payments, then getting a bad credit loan may be in your best interest. If you make those loan payments on time every month, then your credit score will go up. Within a couple of years, with no late payments, you may even be able to refinance your high interest rate loan to one that has a lower interest rate and lower monthly payment.
Bad Credit Loan Options
Even if you have a bad credit history, you do have several options for getting a loan and don’t need to take the first one offered to you. One option is to apply for a secured credit card. These credit cards require that you make a cash deposit to secure the use of the card. Typically, your credit limit will equal that cash deposit. With prompt payments the bank may raise your credit limit over time without requiring you to make a higher cash deposit.
If you need to take out a car or consolidation loan, then a cosigner or person to person loan are two options. With a cosigner, a friend or family member agrees to sign the loan with you. That person’s better credit score will help you qualify for the loan. However, if you default on the loan then your cosigner becomes responsible paying for the loan, which can make for strained relationships. With a person to person loan, you ask to borrow money from individuals through a person to person lending website. By signing up as a borrower for one of these sites, you can request that private investors fund your loan that you agree to pay back at a specified interest rate.