Best Alternatives to bad credit loans 2022

Alternatives to bad credit loans

When you need cash in a hurry, it can be tempting to consider bad credit loans – personal loans available to people with poor or poor credit history. These loans are convenient because they are accessible to most people without the need for a credit check. However, these loans have a trade-off: higher interest rates that will likely cost you more in the long run.

Before exposing yourself to the dangers of bad credit loans, it’s worth exploring your options. If possible, it is best to exhaust these options before taking a high interest loan. Alternatives present better options – lower interest rates, less stringent repayment plans and less risk of long-term financial challenges.

What is the difference between secured and unsecured loans?

Secured Loan:

If you have a house or an expensive car or property or any other substantial asset, you can use it as collateral. This in turn will make you eligible for a secured loan as an option. Secured loans are offered at lower rates than personal loans. Sometimes, when you need a large amount of money, this will be the only option you will have. But always repay your installments as you may lose the assets held as collateral.

If you have trouble making payments on your loan, never put your home up as collateral. Consider various factors before you convert your unsecured loan to a secured loan, especially if you have a bad credit history. The rates look attractive, but if you miss a payment, you could lose the assets held as collateral.

Unsecured Loan:

Unsecured loans are given to borrowers based on their creditworthiness. You are not required to have collateral as a borrower. You must have a high credit score to get an unsecured loan. The loan is not guaranteed by any property or assets. The interest on the loan is fixed and is due at the end of a specified period.

To get an unsecured loan, maintain a high credit score. You must make all payments and repayments on time and never default once.

Raise your credit score before applying

One of the ways that you can get better terms on a loan is by improving your credit score. Doing this opens up the possibility of securing a personal loan that has lower APR and a longer repayment period, as well as more flexibility when it comes to things like your monthly payment date.

Get a secured credit card: If you have some cash available, consider using it to get a secured credit card. Your own money backs onto the secured card, so if you don’t make a payment, you don’t owe interest — you pay it back with your initial deposit. When you pay on time, it is reported to the credit bureaus and improves your credit score.

Pay off credit balances: This may seem counter-intuitive for someone who needs cash immediately, but paying off your balances to reduce your debt utilization has a high impact on your credit score. Pay off your balance strategically by getting your debt utilization below 30%.

Request a higher credit limit: Another way to improve your debt utilization is by increasing your available limit. Contact your credit card issuer and ask if they will increase your credit limit – although make sure you ask if they will require a hard inquiry, as it will temporarily lower your score.

Dispute Credit History Errors: It’s quite common for a credit report to contain incorrect information that hurts your score. Request a free credit report, look for any errors and ask the credit bureaus to correct the error.

Get credit for monthly expenses: Some services, like Experian Boost, will take your monthly payments into account when calculating your credit score. This includes rent, utilities and cable bills. Consistent payments on time can help increase your score with these services.

Also Read: How To Get A Best Loan To Buy A Business In 4 Steps

Which Lenders Offer Bad Credit Loans?

If you have a poor credit score, pledging collateral can help you get a better deal on a loan. Providing collateral reduces the risk associated with lending to you and hence, you can negotiate with lenders to offer you lower interest rates. Such loans which are given against collateral/security are known as secured loans.

However, if you have no collateral to pledge and are looking for an unsecured loan, you may be eligible for the loan if your monthly earnings are high and you work for a reputable firm. In such cases, banks will charge you higher interest rates and chances are you will get less loan amount. For instance, if under normal circumstances, your loan amount eligibility is around 80% to 90%, it will be 65% to 70% due to your poor credit score. There are also chances that you will be offered a shorter repayment term as banks will look to collect the loan amount as soon as possible.

Apart from banks, there are two other options that you can try if you have a poor credit score and want to get a personal loan –

Non-Banking Financial Companies (NBFCs) – There are many NBFCs that will give you a personal loan despite your low credit score but may charge a slightly higher rate of interest. Generally, NBFCs are more flexible than banks when it comes to credit scores. Some NBFCs have approved loans for credit scores as low as 360.
Peer-to-Peer Lending (P2P) – There are several lending websites known as P2P websites, which offer loans up to Rs.5 lakhs with tenures ranging between 12 months to 60 months to people with low credit scores.

Are there any options for bad credit loans?

Yes, there are limited options that you can consider before choosing a bad credit loans. These are the options:

Talk to your current financial provider to offer you a loan that suits your circumstances. An existing financial provider can help you in this regard rather than going to a new provider for a loan.
You can get an overdraft on your current account for a specified amount at 0% interest rate. Never go over your limit on overdraft as random overdraft fees will be very expensive.
Credit unions that are community-driven can provide a real alternative to banks for people experiencing financial hardship. You need to be a member of a credit union to get a loan. These organizations are supportive and their main purpose is to serve their members.

Credit cards are another option available to people with bad credit history. There are dedicated cards for people with bad credit ratings. However, they may have lower credit limits or higher interest rates. Also remember that a failed application will further damage your credit card.

There are payday loans. But it is advised not to take this loan.

Use your own savings as much as possible. It is better to use your savings than to pay the high interest charged on the loan.
The government also provides interest-free budgeting loans to people who cannot afford their rent. But only those with immediate needs will get the loan.

Turn to your family and friends for loans. You can make a mutually beneficial deal and they will be wiser than any financial institution. You can agree on possible interest. Be clear about how you will pay as this has a good chance of affecting the relationship. Agree on a specific deadline and commit to it.

Whatever the problem, stay away from loan sharks. Contact your existing lender and work out a deal that will save you from defaulting on your payments and leaving you with a bad credit history. A lender will always help you and advise you on how to proceed with your current financial situation.

Make extra income

The best way to avoid relying on bad credit loans is to generate additional income, if possible. In most cases, this requires both time and effort. However, there are opportunities available through the gig economy that can allow you to generate additional income.

If you have a car, consider driving for a company like Uber or Lyft. If you’re crafty, consider starting an Etsy store. If you own a property, you can try renting it out to turn it into extra income. Consider donating blood or plasma. Try selling products, furniture, appliances or clothing that you no longer need.

All of these solutions will require time to start paying off, so know that you may have to wait to see results.

Borrow from friends or family

The prospect of asking loved ones for money can be scary, but it may also be the best option for you financially. There is pressure to repay the loan based on maintaining your relationship with the person or persons who are lending you the loan, but the terms may be friendlier than bad credit loans.

Know that you’re not alone—more than 10% of American adults borrow money from loved ones. Financial struggles affect many people, and your friends and family will understand your challenges the most. Even if they can’t help directly, they may be able to support you in other ways once they understand your struggle.

Get a credit card

While it’s not an ideal solution, you may be able to pay some of your immediate bills by securing a credit card. The interest rate on a credit card will be higher than most bad credit loans. However, rates can still be significantly better than those offered by lenders offering bad credit loans options.

Use a home equity loan or HELOC

If you own a home or property that you have paid off, you can take out a loan or line of credit that allows you to turn your equity into cash. In the case of both a home equity loan and a home equity line of credit (HELOC), you will have to refinance your mortgage, but this will allow you to access cash.

A home equity loan will be paid off in one lump sum, while a HELOC works like a credit card, giving you money on an as-needed basis. You may have to pay closing costs from a refinance, but it’s an option to get quick access to money.

Bottom line

Bad credit loans can provide short-term financial help but are one of the easiest ways to get stuck in a cycle of debt that can become increasingly difficult to break. If you can avoid this option, you should.

There are ways to secure money that don’t depend on your credit score and likely won’t carry the same stringent terms as the average bad credit loans. Make sure you explore your options before taking out a bad credit loans.

Frequently Asked Questions on Bad Credit Loans

What credit score indicates bad credit?

Answer: If your credit score is 624 and below it qualifies as bad credit score. In this case, it will be impossible for you to get a loan from a lender. If your credit score is between 625 and 699, your credit score is rated as fair. In this case, you can either get a loan or not get a loan from the bank at all as there is still a possibility that you will have difficulty repaying the loan on time. So, it is always recommended that you should maintain a credit score of 750 and above to get a loan without any problem.

What are the best loans for individuals with low credit scores?

The best bad credit loan options in India are:

Secured loans from banks

Even if you have a low credit score, banks may offer you a secured loan in which you will be expected to pledge collateral or security. This will help you negotiate a better loan deal in terms of lower interest rates, lower EMIs or longer tenure.

However, if you are unable to pledge any collateral, you can opt for an unsecured collateral-free loan like a personal loan if you have a stable monthly income. However, unsecured bad credit loans have higher interest charges compared to secured loans and you may also get a lower loan amount sanctioned. Note that eligibility for an unsecured loan depends on your credit score. However, if your credit score is unavailable or low, you can increase eligibility by providing proof of steady income.

Loans from Non-Banking Financial Companies (NBFCs).
NBFCs also offer personal loans to individuals with low credit scores. NBFCs offer more flexibility than banks when it comes to credit scores. However, the interest charged on such bad credit loans can be high.

Get a loan from your current financial provider

By talking to your current financial provider, you can get a bad credit loan customized to your needs. Since your current bank knows your financial situation, they can approve a loan for you even if you have a low credit score.

Overdraft on current account
Another option is running an overdraft on your current account, where you can get a 0% interest rate up to a specified amount. However, one should keep in mind that exceeding the overdraft limit can be very costly.

Digital lender

Digital lenders are another option that will help individuals with low credit scores. These are community-driven platforms that are a good real alternative to banks for anyone in need of immediate funding. They are generous when it comes to eligibility and approve loans instantly.

Who can apply for a bad credit loan?

Answer: In most cases you can apply for a bad credit loans if you meet the following criteria:

• You are 18 years of age and above
• You are a citizen of India
• You are a salaried or self-employed person
• You have the ability to repay the loan amount on time

What documents do I have to submit to apply for a bad credit loan?

Answer: Below is the list of documents you have to submit to apply for a bad credit loans:

• PAN card
• Passport/Aadhaar Card
• Salary account statement for last two months
• Salary slip for last two months
• Passport size photographs
• A copy of the rental agreement if you live in a rented house

How much loan amount can I get?

Answer: The loan amount you can get will vary from lender to lender. Lenders will decide how much they should lend you based on your credit score, monthly income, expenses and other factors. Generally, the lender will lend you an amount that they think you will be able to repay on time. The loan amount that you can usually get is Rs. 50,000 to Rs. Between 5 lakhs.

How long does it take to get a loan?

Answer: It may take up to 30 minutes for the lender to process your application. However, it will take up to 24 hours for the loan amount to be disbursed in your bank account.

How do I apply for a bad credit loans?

Answer: You can visit the official website of the lender from whom you want to get a bad credit loans. You have to provide necessary documents and submit relevant details. Then you can choose the bad credit loans amount that suits you and the tenure. The lender will then review the documents and details submitted by you, and if found to be correct, the loan amount will be disbursed to your bank account within 24 hours.

Can I take more loans on top of my existing loan?

Answer: Generally, lenders who offer bad credit loans do not offer you top-up bad credit loans. So, if you get a bad credit loans from a lender, it is recommended that you repay the loan amount on time. Once you clear the bad credit loans, you can apply for a new loan as per your requirement.