Getting a loan with poor credit can be a daunting task. It’s no secret that most traditional lenders, such as banks and credit unions, require a good credit score to qualify for a loan. Predatory and payday lenders promise quick and easy cash to those who are struggling financially, but they often come with high-interest rates and fees that can trap borrowers in a cycle of debt. However, there are still many healthy options available to people with poor credit, including credit-building loans and products. Here’s how you can get a loan with poor credit and avoid predatory and payday loans that can trap you in a cycle of debt.
Know and Understand Your Credit Score
Before applying for a loan, it’s important to know your credit score. You can obtain a free credit report from each of the three major credit bureaus (Equifax, Experian, and Transunion) through annualcreditreport.com. But if you want to actually understand your credit report, you can sign up for our no-cost credit report reviews, where you’ll get a copy of your credit report and personalized tips and action steps on how to improve your credit. Your credit score will play a crucial role in determining your interest rate and whether you qualify for a loan. A low credit score can mean higher interest rates, but it does not necessarily disqualify you from obtaining a loan. Getting a credit report review can give you a better idea of what your options currently are and how you can increase your credit score.
Avoid Predatory and Payday Loans
We cannot emphasize enough the dangers of predatory and payday loans. Predatory lenders and payday lenders prey on people with lower credit scores, offering high-interest loans with hidden fees and aggressive collections practices. These loans can trap you in a cycle of debt, making it even more difficult to improve your credit score. Instead, seek out reputable lenders that offer fair and transparent terms. Some examples of predatory loans are payday loans, title loans, tax refund anticipation loans, and rent-to-own companies. Always read the terms and conditions of any loan agreement carefully. Predatory lenders often bury unfavorable terms in the fine print, so it’s important to understand everything before signing anything.
Look into Secured Loans and Credit-Building Loans
If you have collateral, such as a car or a home, you may be able to obtain a secured loan. Secured loans are less risky for lenders because they have collateral to fall back on if you default on the loan. This option can be a good way to obtain a loan with a lower credit score, but be aware that if you default on the loan, you could lose your collateral.
Credit-building, or credit-builder, loans are small loans that help you establish good credit habits. These loans usually have low-interest rates and are designed to be paid back over a few years. The lender will deposit the loan amount into a savings account, and you will make monthly payments toward the loan. Once you finish paying back the loan, you will have a healthier credit history and a higher credit score. Many banks, credit unions, and community development financial institutions (CDFI) offer credit-builder loans. We can help you get connected with some of our local favorites!
Consider Building Your Credit First
If you’re struggling to obtain a loan with poor credit, it may be worth taking some time to improve your credit score first. This can be done by paying off debt, making on-time payments, and avoiding new credit applications. Building your credit score will not only make it easier to obtain a loan, but it can also lead to lower interest rates and better terms on future loans. There are a lot of reputable products available to help build your credit, like secured credit cards.
Secured credit cards are different from traditional credit cards because they require a deposit that serves as your credit limit. These cards are an excellent option for those who are new to credit or who have a low credit score. They help you establish a credit history and improve your credit score. Make sure to choose a secured credit card with a low annual fee and APR. Many banks, credit unions, and CDFI also offer secured credit cards.
Carrollton Bank, St. Louis Community Credit Union (STLCCU), and Justine PETERSEN are a few examples of places that have credit-building loans, secured credit cards, and/or second-chance checking accounts for those who have struggled to obtain and keep a checking account at other financial institutions.
Start Financial Coaching
If you’re struggling to manage your debt, sign up for our no-cost financial coaching! Our financial coaches can help you create a debt management plan that works for you. Don’t pay someone to help you get out of debt! Instead, talk with our coaches for free to see how you can manage and erase that debt yourself. In addition to coaching, you can always check out our personal finance classes and credit report reviews, providing you with the knowledge and resources to help make informed decisions and manage your finances.
Build an Emergency Fund
One of the best ways to avoid predatory loans is to have an emergency fund. This is a savings account that you can use in case of unexpected expenses, such as a medical emergency, car repair, or job loss. Having this emergency fund will help you avoid taking out costly loans to cover these expenses.
Getting a loan with poor credit can be challenging, but it’s not impossible. Avoiding payday and predatory loans is crucial for establishing good credit habits and avoiding debt traps. By understanding your credit score, avoiding predatory and payday loans, looking into credit-builder and secured loans, building your credit first, working with a Prosperity Connection financial coach, and building an emergency fund, you can increase your chances of obtaining a loan with fair terms and without falling into a cycle of debt.