Low Income, High Hopes: Finding Loans You Can Actually Afford
A bad credit score can impact your ability to borrow money. It could be a result of financial missteps, like missed payments or an overdue bill or unforeseen circumstances, such as an emergency expense.
Many lenders specialize in
offering loans for borrowers with bad credit. These include personal loans,
debt consolidation loans and even credit-building cards that may have high
interest rates but are designed to help you build a better financial future.
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1. Personal Loans
For many Americans, finding loans
for bad credit can feel like hitting a wall. Traditional banks often require
high credit scores and extensive paperwork, leaving those with
less-than-perfect histories out in the cold. But specialized lenders offer
personal loans that meet real-world financial needs, with more flexibility and
lower barriers to access.
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When applying for a personal
loan, lenders typically check your credit report and look at your
debt-to-income ratio (all of your monthly debt payments divided by your gross
monthly income). If your credit and income aren't where you want them to be,
work on improving them before you apply. And be sure to calculate your
potential monthly loan payment with a personal loan calculator.
Another thing to consider is your
options for repayment terms. Many lenders have flexible options, including a
fixed interest rate that stays the same throughout the life of the loan, as
well as a variable interest rate that may increase or decrease over time.
A personal loan can help you with
a variety of financial goals, such as paying off debt, making a large purchase
or taking a vacation. But be careful about using one to cover short-term
expenses that can be paid with other forms of financing, such as a credit card
or cash advance. That way, you'll avoid accruing unnecessary fees and extending
the length of your debt payments.
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You can find personal loans from
banks, credit unions and nontraditional sources like online lenders. Before you
decide on a lender, compare offers by evaluating their loan terms, fees and
borrower requirements. Also, consider a lender that lets you pre-qualify
without affecting your credit score, which can speed up the approval process
and give you a sense of what loan amounts and terms you'd likely qualify for.
And always keep in mind that the best personal loan for you may not be the same
as the best personal loan for someone else, so be sure to do your research and
weigh all of your options. It's also important to know how much a personal loan
will cost in total, including the principal, interest and origination fees.
2. Home Equity Loans
Home equity loans, also called
second mortgages, give homeowners the opportunity to tap into their property
value for cash to pay off debt or fund renovation projects. However, if you
have bad credit, it may be harder to qualify than with personal or credit card
loans. Fortunately, it's still possible to get access to this type of financing
if you work toward improving your financial standing over time and follow the
tips offered here.
The key to qualifying for a home
equity loan is building up enough equity in your home, which is determined by
comparing your property's appraised value to what you still owe on the initial
mortgage balance. You can estimate your home's value with an online calculator
or by getting a professional appraisal. Lenders then evaluate a variety of
factors to approve you for an equity product including your credit score,
loan-to-value (LTV), and debt-to-income ratio, which is the percentage of your
monthly income that goes toward debt payments.
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Depending on your lender, you may
be offered different terms and conditions to access your equity including an
interest rate and payment schedule. For example, you could receive a lump sum
from your lender in exchange for a fixed interest rate, or you may be offered a
HELOC (home equity line of credit) that has a draw period followed by a
repayment period.
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