Refinancing, also known as borrowing specifically to restructure debts, often emerges as a cheaper way to repay debts at the same time as managing and lowering the amount of interest and other charges that apply to these debts. However, if a consumer has bad credit, applying for and being approved for a loan at a great rate can be something of a challenge.
For example, a consumer may have credit cards that charge a very high rate of interest (in the 20% – 25% region) and want to avoid paying this cumulatively. In this situation, taking on a loan with a lower rate of interest and repaying these debts will be more economically sound.
Is it Possible to Get a Loan with A Low Credit Score?
Yes – it is possible, but the approach needs to be somewhat creative and “outside of the box” to yield the most suitable and affordable results. Remember – the aim is to borrow to drive down interest rates of pre-existing credit or loans, not borrow to pay more.
Another consideration is to look for approaches that will not penalize you for your low credit score. Ideally, finding a lender that doesn’t take credit scores into consideration may be best.
Consequently, it requires research and careful, selective applications made to the right companies in order to lock-down a lower rate for a loan with bad credit or with a limited credit history
There are a number of routes that consumers can pursue. These avenues are not comprised of the standard, traditional bank application or credit card company loan fodder, as those are really only suitable for those with solid credit ratings. Until and unless a consumer has put the time, effort and work into tackling their finances so that their credit score improves, the conventional sources of borrowing will be off-limits.
However, the following 3 alternative ways to get a loan may be right for you, if you own your own home, rent or want to consider a cutting-edge approach to borrowing. Here are the pros and cons of each:
For homeowners: Home Equity Line of Credit
The solution: If a consumer owns their own home which has retained enough of its value within the real estate crash, obtaining a low-interest, tax-deductible home equity credit line can be a very economically sound way to borrow money without needing to appeal to lenders that may not be forgiving of your credit score.
The drawbacks: Borrowing money from the value of your home can be risky – you may lose your home if you cannot repay the loan. Clearly, the potential consequences are much graver than a missed payment fee or a default on your credit fie. Accordingly, this option is suitable only if you have a reliable income and are meticulous about repaying the equity line once borrowed. It certainly makes for a cheap way to borrow a fairly large amount of cash – just do it mindfully.
For renters or those without other equity: Consider a Credit Union
The solution: Approaching a local credit union can uncover a realm of low-cost borrowing opportunities. Credit unions are community, cooperative bank-like institutions that are owned by members instead of shareholders. This means that people from all walks of life within the community can save with and borrow from credit unions, despite having low credit or no credit score. As they are nonprofits, they pass on any earnings directly to their members and ensure that fees and kept as low as possible – meaning that interest rates for loans are similarly low.
The drawbacks: As with any loan, borrowing from the wrong source can turn an easy loan into a financial drain that is hard to repay. Make sure that repayments can be covered and chose a reputable credit union. It is important to compare loans from a number of credit unions to get the most preferable interest rate for the personal loan before committing. Go to FindACreditUnion.com to see a list of local credit unions and start phoning them to discuss personal loan rates.
For either a homeowner or a renter: A Peer-to-Peer Loan
The solution: For those who are uncomfortable about tapping into their home equity or renters that don’t want to follow the credit union path, peer to peer or P2P lending is a third way. This form of lending first emerged in 2005 and. It operates through online platforms that facilitate borrowing money directly from an individual, instead of from a bank or other institution. The interest rates tend to be low for borrowers with an average rate of 6.5%. The investor lending the money has much more discretion to be sympathetic to your low credit score than a bank may be.
The drawbacks: Selecting the wrong site and wrong investor is the biggest drawback of P2P lending. Doing thorough research is key – sites such as Prosper, Lending Club, Peerform and GreenNote should be considered for potential investor-lenders.
There exist a number of other possible sources to find fast paying, non-traditional lenders. There are fast comparison services that allow for online aggregation and instant decisions, as well as some service that submit your personal loan application to lenders that do not perform credit checks.
Have you used any of the routes to get a personal loan to cover pre-existing debts? What was your experience of peer-to-peer lending, credit unions or using a line of home equity? How much did you save on interest? We want to know what you think! Share your thoughts in our comments section, below!