Have an unexpected expense? Need cash for living expenses, medical bills or other reasons not related to the purchase of a home or car? Most likely, you need to apply for a personal loan. In this article we will discuss the types of personal loans specifically as they relate to people with bad credit.

Overview

Before shopping for any loan it is wise to know the answers to the following questions:

1. What is my credit score?
2. What kind of loan do I need?
3. How much per month can I reasonably afford?

Knowing your credit score in advance will help you be prepared for the types of loans you can qualify for. You may be able to repair your credit before applying for a loan for a better rate.

Knowing how much you need to borrow can help you narrow down your loan choices and also help you keep to your budget by not taking on a larger loan than you really need.

Finally, knowing how much per month you can afford will help you stick to your budget and in the long term, will help you improve your credit by allowing you to pay your bills on time without being overextended.

Types of Loans

• Secured Loans – Secured loans are loans that are backed by some kind of collateral. Collateral can be in the form of any easily-sold asset such as a car, house, land, etc. By using collateral you are giving the lender the right to the asset in the event that you default on the loan. Rates for these types of loans are generally lower but application times can be longer as there is a little more paperwork to fill out.

• Unsecured Loans – Unsecured loans are loans that do not require collateral and are generally based solely on your credit score. These kinds of loans usually have a higher interest rate as the lender is taking a greater risk since they do not have any collateral.

Short-term vs. Long-term loans

Short term loans are typically loans with a repayment date of 1 year or less.  Most often these loans are much shorter term, like 90 days. Interest rates on these kinds of loans can be high – but it will depend on the program. Be wary of payday loans – they can become a trap for some people and with the fees they charge, the total amount you pay for these kinds of loans can be astronomical.

Long-term loans generally are a year or longer and typically offer a better interest rate than a short term loan. Personal loans are typically 3 years or less, although if you have collateral you can often find a loan for a longer term.

Funding Sources

• Banks – Most banks offer loans or personal lines of credit. If you have had your checking and savings account with the same bank for awhile, you may want to consider applying for a personal loan for people with bad credit from a bank. Rates tend to be a little lower than with financing companies and they can be a good way of rebuilding your credit. Application processes can vary, but typically take a number of days so may not be a good option if you are facing a financial emergency and need cash fast.

• Financing Companies – Companies like Beneficial or American General Finance will grant personal loans. In most cases they do require collateral such as a vehicle or other personal property. If you need personal loans for people with really bad credit, and you have some collateral, this may be a good option for you. Interest rates tend to be higher. These kind of companies do report to the credit bureaus so it is a good way to rebuild your credit if you can make your payments on time.

• Private Lenders – Recently there has been an increase in the number of groups who lend money from private sources. Most do require a credit check, but if you have borderline credit this is an area worth looking into. Most of these loans are unsecured loans and can be up to $25,000.

• Pawn Shops – Pawn shops offer a form of a secured loan. You bring in an item with some value, they give you an agreed-upon amount and if you don’t return with the repayment within a certain period of time, they sell the item in question to repay the loan. This can be a good way to raise quick cash, but don’t expect to get what the item is worth and if it means a lot to you be sure to repay the loan on time.

Summary

Personal loans for people with bad credit are available from a variety of sources. Know the length of loan you need and try a variety of funding sources to find the best rates.

In our next article we will be looking in detail at bad credit refinance.

Bad Credit Loans| Part Five: Bad Credit Refinance

For reference, the entire series of articles is listed below.

Bad Credit Loans | Part One: Loans for People with Bad Credit
Bad Credit Loans | Part Two: Mortgage Loans for People with Bad Credit
Bad Credit Loans | Part Three: Car Loans for People with Bad Credit
Bad Credit Loans| Part Four: Personal Loans for People with Bad Credit
Bad Credit Loans| Part Five: Bad Credit Refinance

photo credit: Jay Santiago