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Known for their flexibility, personal loans can be taken for a number of reasons — managing unwieldy credit card debt, paying for an expensive roof replacement, and so forth.
Unlike credit cards or home equity lines of credit, you take out a loan with a fixed amount and have to pay it back with fixed monthly payments at a fixed interest rate. That rate can vary widely between 5 and 36%, depending on your creditworthiness.
In general, the better your credit score and credit history, the lower your rate. But in 2020, banks have raised their lending requirements even higher — making it even more difficult for people with bad credit or a limited credit history to get a loan.
Why Is It Harder to Get a Personal Loan?
Lenders use your income, employment status, credit history, and credit score to determine the likelihood of you paying back the loan — or defaulting on it. That risk is reflected in your interest rate. If you have no debt and a history of paying your bills on time, then you have access to better rates. Conversely, if you have no credit history or have had trouble with debt, your rate will likely be on the higher side, or you may not qualify for the loan at all.
Anuj Nayar, financial health officer at LendingClub, suggests comparing rates when considering the trade-off of a personal loan versus a credit card. “Any [personal loan interest] rate that is lower than the rate you’re paying on your credit card is better than what you’re doing right now,” he says. (Borrowers also need to account for other up-front costs of personal loans, such as origination fees.) The average credit card interest rate is about 16% right now, and it typically ranges from 14 to 26%.
Even if you were laid off recently, you have significant credit card debt, you’ve filed for bankruptcy in the past, or your credit score is below 600, there are options available that could make you a more attractive candidate to the lender — namely, secured loans and cosigners.
However, keep in mind that many lenders have tightened lending qualifications in light of the pandemic and its negative impact on the economy. LendingClub, for example, has refocused efforts on existing customers and upped the verification standards for income and employment. The pool of prospective personal loan applicants has gotten bigger at the same time the economy has contracted, resulting in a tough climate for would-be borrowers.
Secured loans require a form of collateral, often a major asset, to be approved for a loan. Collateral can be your home, bank accounts, or investment accounts, or your car, depending on the lender requirements. This will require more paperwork and more risk on your end, because if you default on the loan, the lender can take possession of that collateral.
The trade-off is the lender will feel more comfortable extending an offer and may give a better rate than if the loan were unsecured. Most loans are unsecured, which come with faster approval times but typically higher interest rates and more stringent credit requirements.
These types of loans may take longer to process, as it requires the lender to verify that you own the assets put up as collateral. In the case of a house or real estate, an updated appraisal may be required to determine the equity value of the collateral.
If you don’t own major assets, or at least none that you’d want to put up as collateral, then getting a cosigner is an option. A cosigner is a secondary borrower with a good credit history that can allow you to qualify for the personal loan, which you would be responsible for repaying. Cosigners may boost your odds of loan approval and likelihood of getting a lower rate because more information is given to the lender, who may be loath to give money to a person with no credit history or poor credit history.
Cosigners don’t have a right to the money from the loan and don’t have visibility into payment history. However, they would be on the hook for the loan if the borrower cannot, or does not, make payments. That’s one reason why it’s important to figure out your loan payment plan before applying for a loan. If you are not confident you can pay back the loan, then you and your cosigner will take a credit score hit.
Alternatives to Personal Loans
What if you can’t get a personal loan, or the interest rate you’re offered is too high to be worth it? There are more options on the market besides personal loans, such as peer-to-peer loans, small business loans, and paycheck advances. Here are two common alternatives to personal loans: credit cards with promotional rates and HELOCs. We find these two are the most accessible to the average borrower, though these options, like personal loans, do favor candidates with good credit scores.
Credit cards with promotional rates
Many credit cards will offer a 0% introductory APR period on purchases and balance transfers for 12 to 15 months. Provided you make at least the minimum payments on time, you won’t be charged interest for the whole time period, after which the interest rate will revert to the regular purchase or balance transfer APR, which will likely range from 14 to 26% depending on your creditworthiness. You may also need to pay a percentage on any balance you transfer, likely between 3 and 5%.
If the math works out in your favor, these credit cards are helpful for transferring debt from high-interest cards and saving interest.
The credit limits tend to be reasonable too. “If you are looking for something to bridge you for the next six months, the credit lines on these cards can be around $10,000 to start,” says Farnoosh Torabi, finance journalist and host of the “So Money” podcast. “If you can pay [the balance] off within that time frame, that’s a great alternative.”
However, it’s important to be mindful of any limits on these promotional rates, as some cards will charge you interest retroactively if you haven’t paid off the balance by the end of the introductory period. As in all situations, we recommend reading the fine print before opening a credit card.
If you own a home, you may be able to tap into the value of your home with a home equity line of credit (or HELOC). Torabi compares a HELOC to a “big credit card limit,” in that it’s a revolving credit line where you can borrow as much or as little as you need, and it isn’t a loan. Like loans, though, HELOCs can be used to fund large expenses or consolidate other forms of debt.
The interest rates — usually variable — tend to be lower than credit cards, ranging from 3 to 20%. However, Torabi recommends caution around a HELOC, as the collateral is your home. There’s also the fact that major banks, such as Bank of America and Wells Fargo, have tightened lending standards around HELOCs amid the COVID-19 pandemic.
“Right now, banks are not being as generous with HELOCs because they know that if you go bankrupt or if you can’t make your payments, you’re going to more than likely default on your HELOC and your primary mortgage. So they have very high standards for who can borrow against their homes,” Torabi says.
Ultimately, you’ll have to weigh the risk yourself and see if the low interest rates and flexible line of credit would afford you the ability to make payments on time.
How to Improve Your Credit
Do you see yourself applying for a loan down the line? Whether or not you might need to apply for a loan in the future, or pursue loan alternatives, basic credit health is always worth keeping in mind. Here are some ways you can up your credit score and become a better candidate to lenders.
Make payments on time
One of the main factors of your credit is your payment history. Do you pay your credit card on time and in full? Do you at least make the monthly minimum payments? In the lender’s mind, a spotty payment history translates to a risky borrower.
If you have difficulty with paying bills or loans, we recommend contacting your creditors and asking for some sort of accommodation — deferred payments, a lower interest rate, some way of relaxing requirements. Many major banks, credit unions, credit card companies, and loan providers have responded to COVID-19 with financial relief programs to help you if you’re experiencing hardship. A formal accommodation from your creditor will also help your credit history because your payment status will read as current, even if a payment has been waived for a month.
Keep credit cards open
Credit scores take into account how long you’ve owned a credit card, so think twice before closing credit cards. Even if you switch to a better credit card, consider keeping the old one open and paying occasional payments to establish a history of responsibility. A scattered history with credit cards can hinder you and lower your credit score.
Request a higher credit limit
The major credit scoring companies (FICO, VantageScore) rely heavily on “credit utilization,” or the amount of available credit used, as a factor for your credit score. The lower the ratio, the better — meaning, $500 balance reflects better on a credit card with a $10,000 limit than a $5,000 balance (50% utilization rate). Experts generally recommend using under 30% of your available credit at any time.
Review your credit reports
Due to the COVID-19 pandemic, you can now get free weekly credit reports through April 2021 from the major three credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. In your credit report, you’ll see payment history for every loan or credit card you’ve taken out, as well as rent and bill payments if you’ve opted in with your creditor. Look through the report for any discrepancies or inaccuracies. You have the right to dispute any errors and get them removed.
NEW PALTZ, N.Y. — The village is considering expanding eligibility for a little-used revolving loan fund to include the needs of businesses being hit hard by the COVID-related economic slowdown.
Mayor Tim Rogers said Tuesday that the $500,000 loan fund could be used to help businesses with more than just the purchase of personal protective equipment allowed under state and federal programs.
“We’re trying to piggyback off of the existing language for the revolving loan fund,” he said. “We just wanted to make it somewhat broad in terms of recognizing COVID impacts.”
One thing the village is considering is eliminating the rule that prohibits the use of the fund for emergency situations or business operations.
“Here we are flipping it and saying that you can,” Rogers said.
Guidelines for the loan program, which was established with funding from the U.S. Department of Housing and Urban Development, were last updated in 2013. The loan fund’s current interest rate is 3%.
Rogers said the fund has received only two loan applications over the past six years, and one of those was rejected.
“There’s only been one that we awarded and one that we straight up denied,” he said, noting that the rejection was because of the applicant’s bad credit history.
Rogers said the COVID-19 pandemic has created something of an economic irony in the village: decreased foot traffic in the business district but a significant increase in applications for building permits.
“[Village Safety Inspector] Cory Wirthmann believes our busy Building Department is partially a function of people traveling or vacationing less,” the mayor said. “ Money they would have spent is now going to home improvement wish list projects or just deferred maintenance, like finally choosing to replace the old roof.”
The short answer is yes: skipping one car payment can hurt your credit score, but not until it hits a certain mark. One missed payment doesn’t destroy your credit score forever, but it can stay on your credit reports for years.
Missed Payments and Your Credit Score
One or two missed payments may not be enough to completely ruin a good credit score, but they can lower your credit score quite a bit. How much your credit score can drop depends on many things, including how much credit history you have and how much time has passed since your missed payment.
How much a missed payment can impact your credit score is heavily influenced by how many missed payments you currently have reported, your current credit score, your credit utilization, how many accounts you have, and more. In other words: your drop in credit score due to one missed car payment is likely to be unique to you. The drop in points could be anywhere from 10 to 100 points, or more.
If you have a thin credit file or little to no credit history, one missed car payment can be devastating to your credit score. And, in some cases, having a good credit score and then a reported 30-day missed payment could hurt your credit score more because you have more to lose.
The severity of the missed payment matters too. If you’re 30 days on the payment, it’s not as bad as being 90 days late. Most creditors report missed payments in these timeframes: 30 days; 60 days; 90 days; 120 days; 150 days; and then delinquent/charge-offs after that. The longer you let that missed payment go on being missed, the worse it is for your credit score.
To bounce back from a missed auto loan payment, be sure to make that payment as quickly as you can. The sooner you make up that payment, the better off you are.
How Long Are Missed Car Payments Reported?
Missed and late car payments can remain on your credit reports for up to seven years. How much they damage your credit score lessens each year, but it can still impact your overall credit score years afterward.
Your payment history is the most influential part of your credit score: a whopping 35%. In terms of credit repair, this means making all of your bill payments on time is important. If you have an auto loan that isn’t currently being reported – meaning your loan and on-time payments don’t show up on your credit report – the missed and late payments are likely to be reported anyway. Even auto lenders that don’t generally report their loans to the credit bureaus typically report missed/late payments.
If you think you’re about to miss a payment and you want to avoid hurting your credit, you have some options to explore.
Ask Your Lender for a Deferment
Lending institutions understand that times can get tough. If you think you’re about to miss a payment, contact your lender right away and ask what options are available to you. Keep your lender in the loop if you’re going through rough times – the sooner you get ahold of them the better.
This is especially true right now, given the current pandemic. Many borrowers left without work have been forced to find alternatives to making payments and needed assistance with their car loans and mortgages. There is a process that allows borrowers to take a breather and gather themselves, and it’s called a deferment.
A deferment, in a nutshell, pushes the pause button on your auto loan. Most times, lenders pause the car payments for up to three months and add those payments to the back of the loan term. If you qualify, you may be able to recenter yourself and get back on track. After the deferment is up, the car payments resume and you continue paying as normal.
The only downsides to this option are that your interest charges continue to accrue, and your loan term is extended. However, in the grand scheme of things, a few more months of a car payment and interest charges is better than default or multiple missed payments!
There is a common stumbling block to deferments though: most lenders don’t approve these plans unless your current on the loan. If you’ve already missed one payment or more, then the lender isn’t likely to approve it.
Is Refinancing Your Auto Loan an Option?
If you’re struggling to keep up with your current car loan, refinancing for a lower monthly payment could be the answer.
Refinancing involves replacing your current loan with another one, typically with a different lender. Most borrowers refinance to lower their monthly payments by either lowering their interest rate or extending their loan term (sometimes both).
Must have equity in the car or the loan balance must be equal to the vehicle’s value
The car is under 10 years old with fewer than 100,000 miles
Your credit score has improved since the start of the loan
You may need to meet other requirements, depending on the lender you choose. Refinancing doesn’t typically require a “perfect” credit score, but you may need a good one to qualify.
Ready to Get a More Affordable Car?
If you’re struggling to make ends meet and worried about skipping payments, then it may be time to sell your car and get something more affordable. If you’re concerned that a poor credit score could get in the way of your next auto loan, then consider a subprime lender through a special finance dealership.
Subprime lenders are indirect lenders that are signed up with certain dealers. They assist borrowers in all sorts of unique credit circumstances, and they could help you get into a more affordable vehicle if you qualify.
Finding a subprime lender can be as simple as completing our free auto loan request form. Here at Auto Credit Express, we work to match borrowers to dealerships with bad credit lending resources in their local area, at no cost and with no obligation. Get started today!
Look at you, so responsible. You received a financial windfall — stimulus check, tax refund, work bonus, inheritance, whatever — and you’re using it to pay off one of your debts years ahead of schedule.
Good for you! Except… make sure you don’t get charged a prepayment penalty.
Now wait just a minute, you say. I’m paying the money back early — early! — and my lender thanks me by charging me a fee?
Well, in some cases, yes.
A prepayment penalty is a fee lenders use to recoup the money they’ll lose when you’re no longer paying interest on the loan. That interest is how they make their money.
But you can avoid the trap — or at least a big payout if you’ve already signed the loan contract. We’ll explain.
What Is a Loan Prepayment Penalty?
A prepayment penalty is a fee lenders charge if you pay off all or part of your loan early.
Typically, a prepayment penalty only applies if you pay off the entire balance – for example, because you sold your car or are refinancing your mortgage – within a specific timeframe (usually within three years of when you accepted the loan).
In some cases, a prepayment penalty could apply if you pay off a large amount of your loan all at once.
Prepayment penalties do not normally apply if you pay extra principal in small chunks at a time, but it’s always a good idea to double check with the lender and your loan agreement.
What Loans Have Prepayment Penalties?
Most loans do not include a prepayment penalty. They are typically applied to larger loans, like mortgages and sometimes auto loans — although personal loans can also include this sneaky fee.
Credit unions and banks are your best options for avoiding loans that include prepayment penalties, according to Charles Gallagher, a consumer law attorney in St. Petersburg, Florida.
Unfortunately, if you have bad credit and can’t get a loan from traditional lenders, private loan alternatives are the most likely to include the prepayment penalty.
If your loan includes a prepayment penalty, the contract should state the time period when it may be imposed, the maximum penalty and the lender’s contact information.
”The more opportunistic and less fair lenders would be the ones who would probably be assessing [prepayment penalties] as part of their loan terms,” he said, “I wouldn’t say loan sharking… but you have to search down the list for a less preferable lender.”
Prepayment Penalties for Mortgages
Although you’ll find prepayment penalties in auto and personal loans, a more common place to find them is in home loans. Why? Because a lender who agrees to a 30-year mortgage term is banking on earning years worth of interest to make money off the amount it’s loaning you.
That prepayment penalty can apply if you want to pay off your loan early, sell your house or even refinance, depending on the terms of your mortgage.
However, if there is a prepayment penalty in the contract for a more recent mortgage, there are rules about how long it can be in effect and how much you can owe.
The Consumer Financial Protection Bureau ruled that for mortgages made after Jan. 10, 2014, the maximum prepayment penalty a lender can charge is 2% of the loan balance. And prepayment penalties are only allowed in mortgages if all of the following are true:
The loan has a fixed interest rate.
The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
The loan’s annual percentage rate can’t be higher than the Average Prime Offer Rate (also known as a higher-priced mortgage).
So suppose you bought a house last year and then wanted to sell your home. If your mortgage meets all of the above criteria and has a prepayment penalty clause in the mortgage contract, you could end up paying a penalty of 2% on the remaining balance — for a loan you still owe $200,000 on, that comes out to an extra $4,000.
Prepayment penalties apply for only the first few years of a mortgage — the CFPB’s rule allows for a maximum of three years. But again, check your mortgage agreement for your exact terms.
The prepayment penalty won’t apply to FHA, VA or USDA loans but can apply to conventional mortgages — although the penalty is much less common than it was before the CFPB’s ruling.
“It’s more of private loans — loans for people who’ve maybe had some struggles and can’t qualify for a Fannie or Freddie loan,” Gallagher said. “That block of lending is the one going to be most hit by this.”
How to Find Out If a Loan Will Have a Prepayment Penalty
The best way to avoid a prepayment penalty is to read your contract — or better yet, have a professional (like an attorney or CPA) who understands the terminology, review it.
“You should read the entirety of the loan, as painful as that sounds, because lenders may try to hide it,” Gallagher said. “Generally, it would be under repayment terms or the language that deals with the payoff of the loan or selling your house.”
Gallagher rattled off a list of alternative terms a lender could use in the contract, including:
Sale before a certain timeframe.
Refinance before a term.
Prepayment prior to maturity.
“They avoid using the word ‘penalty,’ obviously, because that would give a reader of the note, mortgage or the loan some alarm,” he said.
If you’re negotiating the terms — as say, with an auto loan — don’t let a salesperson try to pressure you into signing a contract without agreeing to a simple interest contract with no prepayment penalty. Better yet, start by applying for a pre-approved auto loan so you can get a pro to review any contracts before you sign.
Do you have less-than-sterling credit? Watch out for pre-computed loans, in which interest is front-loaded, ensuring the lender collects more in interest no matter how quickly you pay off the loan.
If your lender presents you with a contract that includes a prepayment penalty, request a loan that does not include a prepayment penalty. The new contract may have other terms that make that loan less advantageous (like a higher interest rate), but you’ll at least be able to compare your options.
How Can You Find Out if Your Current Loan Has a Prepayment Penalty?
If a loan has a prepayment penalty, the servicer must include information about the penalty on either your monthly statement or in your loan coupon book (the slips of paper you send with your payment every month).
You can also ask your lender about the terms regarding your penalty by calling the number on your monthly billing statement or read the documents you signed when you closed the loan — look for the same terms mentioned above.
What to Do if You’re Stuck in a Loan With Prepayment Penalty
If you do discover that your loan includes a prepayment penalty, you still have some options.
First, check your contract.
If you’ll incur a fee for paying off your loan early within the first few years, consider holding onto the money until the penalty period expires.
If you don’t have a loan with a prepayment penalty, contact your lender before sending additional money to ensure your payment is going toward principal — not interest or fees.
Additionally, although you may get socked with a penalty for paying off the loan balance early, it’s likely you can still make extra payments toward the balance. Review your contract or ask your lender what amount will trigger the penalty, Gallagher said.
If you’re paying off multiple types of debt, consider paying off the accounts that do not trigger prepayment penalties — credit cards and federal student loans don’t charge prepayment penalties.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Readher bio and other work here, then catch her on Twitter @TiffanyWendeln.
This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.