For most families, each month is a paycheck-to-paycheck struggle. When an emergency hits, the financial burden can be crippling. Maybe the car died, and the repairs cost more than the vehicle is worth or a lost job leaves a gaping hole in the family’s cash flow. But even what we consider minor financial setbacks like having to hire a repairman to fix the HVAC can leave a bill that far exceeds what the monthly income can comfortably cover.
If a family has stored away extra cash in savings, then the hit to the finances is not quite as devastating. However, many families don’t have savings or any other means to make up the difference, and then a loan becomes the best –and sometimes only–option. Securing a loan is easy with great credit, but if late payments, high balances on a credit card or a bankruptcy have left an individual’s credit score damaged, finding a loan may become much more challenging. Major lenders don’t want to back a loan to individuals with poor credit.
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So just how low is too low when it comes to the FICO score? A credit score below 669 is considered fair down to very poor. Individuals with low credit scores are grouped into the ‘subprime’ category; this means they are a higher risk for lenders as they may pay late or even default on their loan. Subprime loans typically hold higher interest rates to accommodate for the risk that the banks take on when they agree to back the loan.
Some credit scores may be so unfavorable that banks may refuse to agree to any loan terms—even with a high interest rate. In this situation, individuals need to seek out other options to secure the loan that they may need.
So, where do you turn when your credit score has hit rock bottom and you’re desperate for cash…NOW? Here are some tips that may help you get a loan with bad credit.
Your Bank or Credit Union
When you need a loan and your credit is shaky, the first place you can turn is your bank. This can be for your car loan, mortgage or even your checking account. Of course, if you pay your loan late, you have a history of overdrawing your checking account or you’ve defaulted with that bank, then this option is not recommended.
Credit unions also may offer more favorable rates for current customers. Again, though, you need to have a good history with your credit union. No overdrafts or bounced checks. Be honest about your situation, because they are going to see that FICO score. You may be eligible for an overdraft line of credit for your checking account to get you through your tight situation, or there may be other types of personal loans available through the bank or credit union.
Head to your personal bank if:
- You pay loans on time.
- You have paid a loan off in full.
- You have rarely (or ever) over-drawn an account.
Family or Friends
If your bank or credit union says no to a loan, you may try to secure a personal loan from a friend or family member. Before you do this, however, remember that loans between friends or family may put a strain on the relationship. Understand that you’re getting into a lender situation that holds similar responsibilities. When agreeing to terms with a friend or family member, make sure to get everything in writing and understand how you will make repayments.
In some instances, friends or family members may gift you the money. This may hold tax implications, however, so talk to your accountant about any financial gifts.
- Discuss repayment options and interest rates
- Get all terms in writing
- Keep a copy of your signed contract
Home Equity Lines of Credit (HELOC)
Your home gains equity almost every year (in favorable economic climates). The equity builds as you pay down your home mortgage, and this means that when you sell your home, you should gain a financial profit. Equity is the difference between what your home is worth and how much you owe. The equity value is alluring to banks—and to your family—because as long as you owe much less than the sale value of the home, then your home is an asset rather than a liability.
Home Equity Lines of Credit (or HELOCs) allow you to take a loan against the equity of the home and use the cash for improvements or other expenses. However, before you take out a line of credit against your home equity, you absolutely must understand the loan terms. All HELOCs are not created equal. Make sure to talk to your bank or lending institution about the terms of your loan.
Always remember that when you dip into your home’s equity, you will make less money (theoretically) on the sale of your home if you sell the home sooner rather than later.
- Examine all terms including interest rates and repayment structure.
- Discuss with your lender any provisions of the loan/line of credit.
- Be aware that using your home’s equity will affect the resale earnings if you need to sell your home sooner rather than later.
Payday or Title Loans
Payday loans allow you to have access to your next paycheck before you receive it. A title loan uses the value of your car as the basis for a cash loan. Both loan options are available to individuals with low credit scores and may be a quick and easy way to secure the cash you need.
When you agree to a title loan, you are using your car’s title as collateral for the loan. You can borrow a percentage of the value of your car. However, if you fail to make payments on time, the lender can repossess your vehicle. This type of loan carries a high annual percentage rate (APR). Make sure you read the terms carefully.
Payday loans also typically have higher interest rates attached to them. Before you commit to the loan, always read the terms and understand your payment options.
Before you take out a payday or title loan, you must understand that you should NOT rely on these loans for your day-to-day expenses. Some individuals end up in deep financial trouble because they take out numerous loans with multiple lenders. And, according to an article on The Street, “one in five car title loan borrowers end up losing their vehicles.”
- These loans are a quick and easy way to secure cash, but you need to review interest rates and lending terms
- Look at your monthly budget to ensure that the payments won’t seriously impact your financial bottom line.
Private or Individual Lenders
Some individuals loan money as personal loans. You can find individual lenders online, and loans are available for individuals needing extra cash for weddings, debt consolidation, or any other need. Terms may vary because you’re not dealing with a large bank or other financial institution. Again, be sure to understand all the terms, especially the repayment schedule and the interest rate. Don’t commit to any loan that offers terms that force you to stress beyond your financial means. Individual loans allow you to shop around, so find the terms that work for your individual needs and budget.
- Review all interest rates/repayment terms before signing.
- Don’t take the first deal; make sure to compare offers and terms to ensure you have the best loan for your financial situation.
Crowdfunding Sites: Are they an option?
If a serious financial hit was the result of a tragedy or major medical issues—like cancer or another serious illness or injury—sites like GoFundMe can allow you to crowdsource funds by sharing the story and the events that led you to seeking help. These sites have increased in popularity over the years, but they also have been abused and misused by those who want money without any strings attached.
Sites like GoFundMe only should be used for serious situations and should be a last resort. GoFundMe sites are typically started to help families with funeral costs, cancer treatments or other tragedies. They should not be used to avoid financial obligations.
GoFundMe stories that exemplify the point of the site–and crowdfunding–include a fundraising effort that was started to assist a wounded police officer’s family to cover future health expenses and other needs. A GoFundMe page and fundraising effort also has been used to help Tia Coleman, who lost nine family members in the Branson, Mo. duck boat tragedy.
Before you begin your donation site, know that:
- Crowdfunding/donation sites are not lenders and should only be used for major emergencies (serious illnesses and tragedies).
- There may be tax issues with crowdsourcing, so discuss all tax implications with your accountant.
- You need to be honest about your needs; don’t EVER use dishonest tactics or misrepresent your situation, otherwise you might find yourself at the center of legal issues or even a criminal investigation.
Your credit score tells banks and financial institution about risk level; a low score puts you into the subprime category and typically carries higher interest rates to compensate for the higher level of risk taken by the lender. However, subprime loans aren’t the only option for individuals with poor credit that need cash now. Loans from friends or family, private or personal lenders, home equity lines of credit or even payday and title loans also offer cash-strapped families a means to obtain the financial help they need. These loans also may carry high interest rates, so If you can’t afford the repayment terms, then you absolutely should not agree to the loan. Research your options and find the right loan and lender that fits your budget and allows you to have access to the funds you need now.