A report by FICO revealed that more than a quarter of Americans have subprime or lower credit scores. That means, on a scale of 850, they generally score between 300 and 620. People with lower credit scores may experience difficulties qualifying for a loan, but they do have several loan options available to them. To understand the value of these loan options, here is a bit more detail on the people who can benefit the most from them.
The average credit score tends to improve with age, so younger Americans are more likely to have lower credit. However, there is a glaring anomaly in people between the ages of 30 and 39. This age group constitutes the largest population of consumers whose credit score is below 620.
Many people in their 30s have begun to settle down, which comes with expenses and debts such as first mortgages, weddings, and other expenses. A study on American credit card habits showed that many in this age group also have too much credit card debt. Those below the age of 30 also have lower average credit scores. There could be many reasons for this, but this age group typically has limited access to credit.
The 2009 CARD Act made it a bit more difficult for anyone between the ages of 18 and 21 to open new credit card accounts. This means that many young adults cannot start building up their credit history until later in life. Roughly 11% of the American population does not have a credit score (referred to as “credit invisible”). This group faces even more difficulty getting loans compared to those with bad credit.
Fortunately, several lenders offer loan options for people with bad credit. You can even find loan options that don’t require any credit check, which can benefit the credit invisible group.
Here is a comprehensive list of such loan options.
- Personal Loans with a Co-Signer
A convenient way of securing a personal loan (if you have bad credit or no prior credit record), is getting a co-signer who has an excellent credit score. In such a case, a co-signer offers a layer of security for the lender by committing to pay in case you default. The largest advantage of this type of loan is that a credible co-signer increases your chances of getting a loan with reasonable terms and rates.
Similarly, if your loan application was rejected, a co-signer can help you in securing the loan. Also, if you get a loan with unfavorable rates, a re-application with a credible co-signer might give you a better deal.
Your spouse, guardian, parent, any other close relative, or even a friend can be a co-signer. Whoever you select should have a good to excellent credit score, a regular income, and be fully aware of the responsibilities of being your co-signer.
- Joint Personal Loans
A personal loan with a co-signer has some similarities and differences with a joint personal loan (a personal loan with a co-borrower).
In a joint personal loan, the co-borrower shares the responsibility of repaying the loan with you right from the start and receives part of the loan amount. On the other hand, co-signers are not entitled to any share of the loan amount and will only make repayments if you (the primary borrower) happen to default.
One similarity between joint and co-signed personal loans is that the credit of your co-signer or co-borrower can help you qualify for a personal loan with better terms.
Just as co-signers have to repay the personal loan when primary borrowers default (a 2016 report showed that this affects 38% of co-signed debts), a joint borrower must make the full monthly payment in a joint personal loan when the other joint borrower defaults.
- Personal Loans for Bad Credit
Personal loans are arguably the fastest-growing mode of consumer lending in the U.S. According to the latest TransUnion consumer credit report, this type of debt grew 19.2% in the first quarter of 2019.
In spite of the remarkable growth in personal loans, the percentage of seriously delinquent borrowers was a paltry 3.47%, a record low, for the first quarter of the year. This means personal loans offer friendly terms that can help people with bad credit in repaying their debt.
You can receive a personal loan from banks, online lenders, or credit unions without any collateral. These unsecured loans require no guarantees, unlike a secured loan, which requires some form of collateral. If you have bad credit, a secured personal loan may be easier to access.
Some lenders also offer unsecured personal loans to people with bad credit. While these loans normally come with higher interest rates than loans for people with good credit, they can be cheaper than car title or payday loans.
Personal loans generally offer larger amounts than car title or payday loans and usually come with longer repayment periods. You can repay a personal loan up to a period of 84 months, or longer, with loan amounts ranging from $100 to $100,000, and fixed or variable interest rates.
The APR (annual percentage rate) for personal loans varies based on your credit score, ranging from an average of 7.25% (if you have a 720+ score) to over 100% (if your score is less than 600).
- Peer-to-Peer Loans
Also known as marketplace lending, peer-to-peer lending helps individual investors fund individual borrowers. The P2P lending industry has been growing steadily at an annual rate of 32.5% between 2014 and 2019. It’s currently worth $2 billion.
Requirements for this type of loan vary—although P2P lenders might not closely analyze your credit. Like personal loans, peer-to-peer loans typically offer lower interest rates than car title or payday loans. You can also get larger loan amounts and longer repayment periods.
The process of borrowing from a peer-to-peer platform usually involves these steps:
- You submit an application that may include a credit check.
- The platform shows you your possible interest rate so you can decide whether to proceed to the funding stage.
- In the funding stage, individual investors review your loan request and decide whether to fund it.
Once your loan is successfully funded, you will then move to the repayment stage and begin making regular payments during the life of the loan.
Each payment that you make is divided among the individual investors who funded your loan. Each investor gets a proportional share based on his/ her contribution. You can receive P2P loans worth $40,000 or higher.
The various types of P2P loans include:
- P2P Personal Loans
Borrowers typically use these types of loans to buy cars, pay medical bills, consolidate debt, and meet other personal expenses. Personal loans are normally easier to access through social lending platforms since they typically don’t have strict requirements, unlike traditional financial institutions.
- P2P Business Loans
These kinds of loans can take care of start-up expenses, facility maintenance, and repair, marketing, product launch, or other business costs. Social lending groups are a convenient source of business loans since potential borrowers can present their business proposals to multiple investors. This increases the chances of loan approval and funding.
- P2P Student/ Educational Loans
These are usually lump-sum loans and give borrowers the flexibility to use the money for a variety of school expenses. If you cannot get federal student aid, social lending platforms can offer inexpensive alternatives for students.
- Payday Alternative Loans (PALs)
Payday alternative loans (PALs) are short-term loans normally offered by some federal credit unions. They normally have lower interest rates and fees than ordinary payday loans. PALs must meet the following requirements set out by the National Credit Union Administration (NCUA), which controls federal credit unions in the United States:
- Interest rates cannot exceed 28%, although interest rates may vary during the life of the loan.
- The loan amount must range between $200 and $1,000.
- Borrowers must repay the loan within a period of one to six months.
- The application fees must be less than $20.
- Each borrower can receive up to three PALs within a six-month period, without any PAL overlap or rollover.
- Payday Alternative Loan II (PAL II)
The PAL II is an additional payday alternative loan option. This new PAL provides similar protections as the original PAL, but it offers higher loan amounts and longer repayment periods. The loan is offered by some federal credit unions. PAL II must meet the following requirements set out by the National Credit Union Administration (NCUA):
- Loan amounts up to $2,000.
- Repayment periods ranging from one month to 12 months.
- Federal credit unions can offer the loan immediately when borrowers establish membership.
- The lender can offer only one type of PAL at any given time.
- Car Title Loans
If you have bad credit, car title loans could potentially be a good alternative. The fact that borrowers offer the titles of their vehicles as collateral for the loan makes lenders more willing to offer the loan. These types of loans normally have a repayment period of 30 days or less, and the amount is often equal to about 25% to 50% of the current value the car used as collateral.
Typically, you can receive a loan for an amount ranging from $100 to $5,500, and it can even go up to $10,000 or higher. Despite having a form of collateral, the annual percentage rate (APR) of many car title loans falls somewhere in the triple digits.
You will mostly find car title lenders operating from storefronts or online. Online lenders will typically give you a list of title loan stores operating closest to you. To finalize the application process, you must physically present your car, a clear title, proof of insurance, and a photo ID. Many lenders will also ask for a duplicate set of your car keys.
To be on the safe side, wherever you go for a car title loan, you need to do two things:
- Carefully review the loan terms beforehand to avoid any unpleasant surprises.
- Be wary of “add-ons” such as vehicle roadside service plans, which may inflate the cost of your loan.
When your car title loan is approved, you receive the money in your account, and the lender keeps your car title. You can only get your title back once you fully pay off the outstanding debt.
Remember that if you cannot repay the loan, the lender can repossess your vehicle.
- Invoice Financing
Invoice financing can help business owners to free up capital when unpaid invoices slow down their cash flow. If it suits your unique funding requirements, invoice financing can be another alternative for business owners who have a poor credit score. Basically, it’s a self-collateralizing loan: the unpaid invoice acts as security for the financing.
This category of loans is most suitable for business-to-business (b2b) startups. You’ll receive an advance of around 85% of the invoice amount from a lender. The lender will then follow up on your invoice, and once your client pays up, you will receive the balance after the lender has deducted the loan amount and fees.
Lenders who offer invoice financing can help you turn your invoices into instant cash, and they are often ready to work with borrowers who have low credit scores.
This type of financing helps to sustain the cash flow of your business. It can help you pay your own bills even if your clients delay or pay erratically.
- Equipment Financing
Businesses are spending more and more money on equipment, especially computers and communications tools, which has driven the need for equipment financing.
Equipment financing is particularly interesting since the loan provides its own collateral. The equipment you purchase or lease using this loan serves as the security, which also means that this type of loan typically has favorable interest rates.
However, this type of loan is specifically designed for business equipment. You cannot divert it to other expenses. Borrowers normally use it to purchase equipment like lawnmowers, trucks, tractors, or walk-in-coolers.
The typical equipment financing rates and terms include:
- Loan amounts of up to 100% of the value of your equipment
- Fixed interest rates ranging from 6% to 24%, or higher
- Quick funding within typically three business days, although sometimes it’s a bit longer
- Repayment periods lasting from several months to ten years or longer
Lenders may also have a minimum credit score or specific business operating history requirements.
- Purchase Order Financing
Like invoice financing, lenders in purchase order financing will take over your purchase order, while offering the necessary funds to allow you to supply products to your customers.
Purchase order financing is different from invoice financing since you get funding before delivering goods to and invoicing customers. Essentially, you get money to pay your supplier who provides the goods that your customers ordered.
After customers pay, lenders give you the balance after subtracting the loan amount and fees. This financing helps you to avoid the enormous capital needed to execute big orders from clients. But it will cost you 1.8% to 6% of the purchase order value for the first month, with extra costs after that.
Purchase orders typically have the following minimum requirements:
- Your supplier and customer are creditworthy
- The purchase order has a 15 percent or higher profit margin
- You have a business or government customers (B2C businesses are not eligible)
- You sell tangible goods
- Hard Money Loans
Hard money loans have some similarities to equipment financing. Just as equipment financing funds equipment purchases, hard money loans finance real estate as well as fixed assets.
The asset you purchase will serve as collateral for the hard money loan, which makes these types of loans accessible for startups, small-scale businesses, and individuals with bad credit.
The key features of hard money loans include:
- A short-term financing avenue
- A much higher interest rate compared to ordinary bank mortgages
- Lenders include costly processing fees
- Prepayment penalties for early loan payment
- A large down payment, usually 30% or more of the value of your loan
- Helps people who have equity but cannot get traditional loans
- Quick funding, usually within two days
- Lenders typically do not require financial disclosure or credit checks
- Online Line of Credit
Compared to banks, online lenders usually have softer qualification requirements and faster funding for lines of credit. However, the interest rates for online lines of credit are normally higher than banks. When you get a line of credit, you can access cash on demand, which allows you to borrow up to a set amount, while only paying interest on the amount you borrow.
If you’re running a business, the line of credit gives you capital that you can regularly utilize. It can even be in the form of a revolving credit line, which reverts to the initial amount once you pay the pending balance.
- Short-Term Loans
This type of loan offers a speedy and accessible financing option because you can get approval in just one day. Once you get the loan, you can make daily or weekly payments for up to one year.
However, short-term loans typically come with high-interest rates. Therefore, if you want to take this type of loan, keep that in mind when making payments.
- Loans from Family Members or Friends
Getting a loan from close friends and family members can be challenging. Although such a loan may not require a credit check, it has the potential of ruining an important relationship if things go wrong.
Therefore, you should probably only consider this option as a last resort. Only do it if you are sure that you will be able to honor your promise of repayment. Although this kind of loan largely depends on good faith from both the lender and borrower, make everything official by drafting a loan agreement.
Clearly spell out the loan terms, including interest rate, duration of the loan repayment, and installment amounts. This helps prevent broken relationships, hurt feelings, and possible legal tussles from avoidable disagreements.
Some of the benefits of getting a loan from a close family member or friend include:
- Approval and loan terms may not necessarily depend on your credit score
- Receiving the money instantly
- The payment plan is negotiable and flexible
- The interest rate might be low or even non-existent
On the other hand, some of the disadvantages of getting a loan from a family member or friend include:
- Putting an important relationship at risk
- You cannot easily borrow large amounts
- Changes in your relationship can adversely affect your loan terms
- You may face legal action for minor disagreements
- Payday Loans
Payday lenders normally don’t check your credit when deciding whether to give you a loan. According to a survey by CNBC, 11% of adults in the United States have taken out a payday loan. Moreover, payday loans are a whopping $9 billion business in the United States.
The extensive use of payday loans has a lot to do with how easy they are to get. All you need is a legal ID, bank account, and sufficient proof of income. Once you get the loan, the principal, service fees, and interest are normally due on your next payday. Therefore, payday loans are meant for short-term financial needs. The typical payday loan amount is roughly $500, and it normally comes with higher fees. The interest alone can cause some payday loans to be a bit costlier than other loans.
As much as payday loans may provide quick funding, the Consumer Financial Protection Bureau revealed that the fees charged for a normal two-week payday loan result in an annual percentage rate (APR) of about 400%. This is higher than the APR on credit cards, which ranges from 12% to 30%.
If you take a $500 payday loan, at an APR of 391%, you will pay $575 two weeks later. However, some borrowers have a tendency of “rolling over” their payday loans several times. If you do that for about three months, on your $500 loan, the amount you will owe will be over $1,000.
Certain states do not offer payday loans, while other states have placed tighter regulations to ensure consumers are protected.
The different types of payday loans include:
- One-Hour Payday Loans
With this type of payday loan, you can get a loan decision within one hour—or perhaps even instantly. The process is fast and easy; therefore, it’s suited to emergencies or urgent circumstances.
- 24-Hour Payday Loans
In this type of payday loan, you can expect to have the money in your account in less than one business day after approval. This is different from normal payday loans, which can take two to four business days before the money reaches your bank account.
- Instant Cash Advance
With instant payday loans or instant cash advances, the processing of your loan begins immediately after you fill out an online application. The lender may contact you by email, phone, or both to finalize the loan application process.
- Payroll Advance
This kind of payday loan is a short-term unguaranteed loan, which allows employers to release payroll funds to their employees well in advance.
- Military Payday Loan
Military payday loans are particularly designed for people in the military.
These members can expect friendlier interest rates and fees because all active duty service members, together with all their dependents, are entitled to special protection through the Federal Military Lending Act (MLA). Such protections include a cap of 36% on the military annual percentage rate (MAPR). Other limitations apply on what lenders can charge for payday and other consumer loans.
However, all military personnel are expected to abide by strict financial restrictions. According to the Uniform Code of Military Justice (UCMJ), military members who fail to meet their financial obligations can be transferred, discharged, confined, or even court-martialed.
- Merchant Cash Advance (MCA)
If you have a business and are unable to qualify for other loans, a merchant cash advance (MCA) is one of the most flexible loans. The flexibility of MCAs is based on the fact that you pay more when business is doing well, and less when business is slow. This is because lenders take part in your credit and debit card sales (between 8% and 30% of your sales) after advancing you some cash.
You can get a cash advance of up to 250% of your company’s normal debit and credit card sales. Some lenders might offer a fixed dollar amount ranging from $2,500 to $250,000, or as high as several million.
You don’t need a spotless credit to qualify for a merchant cash advance, but lenders often require that your business meets the following criteria:
- An operating history involving credit and debit card payments
- Credit and debit card sales
- Specific minimum monthly card sale volumes
- Particular minimum annual revenue
Despite being a form of debt, an MCA isn’t technically a loan since the merchant cash advance company is purchasing your future debit and credit card sales. Therefore, an MCA doesn’t follow the same regulatory standards as typically business loans. The absence of regulation makes the merchant cash advance one of the most expensive loans.
Fortunately, legitimate MCAs are regulated by the Uniform Commercial Code established by each US state, rather than such federal banking laws as the Truth in Lending Act.
Out of the wide variety of options available, someone who happens to have bad credit can identify the best loan options available to them. Although some options offer better rates and terms than others, the one that suits you will also depend on how well it matches your specific needs. For instance, loan options specifically designed for businesses can better serve business owners.
Most importantly, prompt and complete repayment of the loan you take can help improve your credit score, so you can qualify for better loan rates in the future.