Bad credit is a heavy cross to bear, especially when you need to borrow money. While many traditional lenders won’t approve a loan for individuals with bad credit, there are alternative lenders with loan programs specifically geared toward borrowers with a low FICO score. So the question isn’t whether these loans exist, it’s whether you should get one.
Who’s Offering Bad Credit Loans?
Bad credit loans often have very high interest rates in order to compensate for the risks their borrowers present. These high interest rates can make it difficult to pay back the loan, but there could be other problems as well, depending on the lender you choose to borrow from
- Payday lenders: Often, these companies impose strict repayment requirements and a fixed fee that’s extremely high when broken down into an annualized rate. Between the aggressive repayment schedule and high fee, the loan itself often forces borrowers to hop on a lending hamster wheel with no end in sight.
- Tribal lending: Native American tribes have sovereign rights that may prevent you from suing them and prevent regulators from holding them accountable for certain lending standards and laws. As a result, they often demand unreasonably high interest rates and possibly unscrupulous collection practices.
- Peer-to-peer online lenders: These companies match people who have money to lend with those who are seeking some temporary cash flow. Not only do the lenders make money, but the company matching lenders to borrowers takes some of the interest as well. This results in unreasonably high interest rates, which can continue to suppress your financial success and keep you borrowing month after month.
Alternatives to Bad Credit Loans
Sometimes, bad things happen and you need extra cash. During these times, a bad credit loan can feel like the only option you have. But there are other choices you may be able to make.
- Make payment arrangements: Many lenders would rather make a payment arrangement with you than have you default. Call your credit card companies, bank and others you owe money to and propose a payment arrangement that gives them their money and you some breathing room.
- Sell something: You may have property that you can afford to sell. If you do, try to do your research first—don’t sell with such urgency that you get less than you could have. Also, make sure to adjust any insurance policies with limits that are affected by your not owning that property anymore.
- Stick to a strict budget: Sometimes, people who think they need a short-term bridge loan to get them out of a sticky situation could actually rework their budget aggressively, stopping all unnecessary spending, and be fine without borrowing money. Before you take the borrowing plunge, tweak your budget and see if you can’t funnel more of your income toward the problem and avoid loans altogether.
- Pledge collateral: This is a tricky one, because you could lose more than just points on your credit score. But if you really need the money, and you know you can pay it back, go to your local bank or credit union and apply for a loan backed by collateral such as your home or car. By pledging collateral through a regulated lender, you can avoid usurious interest and overly aggressive repayment demands.
- Borrow from retirement accounts: It’s generally a bad idea to borrow from your retirement, because the money you borrow won’t grow while you’ve taken it out of the account. Likewise, you will be charged fees for the move. But if you have to have the money, it could be a better option than working with a predatory lender and the only person you’ll need to pay back is yourself. Remember, if you don’t pay the loan back, not only will your retirement fund fall short but you’ll also be charged taxes and early withdrawal penalties.
- Borrow from a life insurance policy: If you have a permanent life insurance policy, such as a universal life or whole life, you may have cash values that have accrued. You can borrow from this cash value and pay yourself back according to the insurance company’s schedule. Just remember, if you pass away before paying it back, the amount you borrowed will be taken out of the death benefit your beneficiaries are meant to receive.
It’s not easy to get through an emergency situation requiring an influx of cash, but going with a bad credit loan could put your future in an even worse state than your present. Instead, look for alternatives to borrowing from predatory lenders and patiently work toward financial recovery.