Poor credit loans can be hard to find, and they are almost always more expensive. Difficult economic conditions, simple bad luck, or combination of the two, can damage anyone’s credit score. Once your credit score is damaged, it can take years to repair. Meanwhile, if you need to do a debt consolidation loan, or if a sudden need for capital arises to meet an unexpected emergency, getting a loan for the cash you need can be a real problem. Applying for credit in the wrong places, and getting turned down is not only frustrating, it can further damage credit score. Because commercial banks and credit unions usually have policies which prevented their loan officers from extending loans to applicants with credit scores below threshold level, you’ll probably have to work with the specialized non-bank lending companies. Interest rates and fees charged by these organizations are always higher than those available from banks and credit unions. For a variety of reasons, however, credit terms available to you can vary enough to make a real difference from one non-bank lender to another.
The Business of Making Poor Credit Loans
Companies that make poor credit loans are different in several respects from commercial banks and credit unions. They understand that the borrowers they serve wouldn’t be coming to them if they didn’t really need the money, and often need it quickly. They also know that the default risk with the clients they serve is higher than would be acceptable by commercial bank or credit union. Success in the poor credit loans business depends on understanding default risk for every client they serve, and ensuring that they charge each client a high enough interest rate so that in the aggregate, the interest and fees on each individual loan is high enough to more than offset the predicted default rate. An interesting but important point is that most of the larger companies in the poor credit loans business put together packages of loans they have made to individuals, and sell the packages to third parties, thereby recovering the capital they have lent so they can lend it again. In some cases the bundle of loans that they sell to the third party include a guarantee that the default rate for loans within the package will not exceed an expected level.
Tips for Finding the Best Sources for Poor Credit Loans
As stated above, companies that extend loans to people with a troubled credit history expect to get much higher fees and interest rates than banks and credit unions. That does not mean that there is no competition between the firms engaged in this type of lending. Here are some tips to help you take advantage of the competitive forces within the industry:
- Before you start your search for lender, get a copy of your credit report and review it carefully for errors or evidence of fraudulent use. Errors and fraudulent use do occur, and successfully contesting them can rapidly improve your credit score.
- Don’t approach troubled debt lenders with a bull’s-eye painted on your face. No matter how serious you personally believe your need for a loan is, take the time to gain an objective perspective on your financial circumstances. Talking to an experienced debt counselor prior to beginning your search is often a good idea.
- As with gas stations, on any given day there is always some variation between prices, and the biggest companies don’t always offer the best available deal. An experienced a debt counselor with his finger on the local market may be able to point you towards highly efficient smaller companies eager to have your business.
- Once you have assured yourself that your credit report is in order and you have an objective understanding of the size of the loan you need and the monthly payment can realistically afford, talk to a number of loan officers at different firms before completing an application (and authorizing a credit check). If you know your credit score, and have your credit report with you, a loan officers should be able to give you a fairly accurate estimate of interest rate and loan terms their company can offer you.
Tips for Repairing Your Poor Credit Score
While you may have an urgent need for poor credit loan today, over the longer term, knowing how to improve your credit score can paid big dividends. Here are some tips to consider:
- As quickly as you can, establish a “rainy day” savings account. The most important step in improving your credit score is to establish a history of on time payments. Even a small savings account may be enough to help you through a tight budget month without adding new “late payment event” to your credit history.
- Having a number of credit cards is not necessarily bad for your credit score. What can hurt your score, however, is credit card balances that remain near the credit limit for the card. Focus on paying down cards near the credit limit first. Making regular payments on a number of cards with low balances can actually help your score.
- When it comes time to replace a household appliance, instead of putting the appliance on a credit card, look for an opportunity to take advantage of an installment loan with payments you know you can handle. Paying off installment loan on time with no late payments will also strengthen your credit score.
- Be careful not to authorize too many formal credit checks by lenders that you don’t end up doing business with. A large number of credit checks are seen as a red flag on your credit report, and can lower your score.
A Final Note
The business of making poor credit loans can be highly profitable, it has often attracted the attention of individuals looking to profit from the misfortunes of others. Watch out for firms that have just opened shop in your community, and are offering terms that seem too good to be true.