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How to Get a Loan With Bad Credit| NextAdvisor with TIME

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Gaining access to credit, like a loan or a new credit card, has become more difficult this year. And if you’ve got a credit score that lenders have deemed “bad,” it’s even harder.

Reacting to economic uncertainty, banks have tightened lending standards for households across all major categories in 2020, including mortgage, credit card, auto, and consumer loans, according to Federal Reserve data.

Lenders and creditors use your credit score and the details on your credit report to determine your creditworthiness, or the risk that they might take on by lending you money. If you have a bad credit score, lenders may view you as more risky, making it difficult to earn both loan approval and favorable terms. 

For instance, a bad credit score may result in your mortgage lender approving you for a higher-interest loan. But even a small percentage difference could result in you paying thousands more in interest over the lifetime of the loan. And some lenders or credit card issuers may not approve you at all with bad credit, or may charge higher fees to offset their risk. 

But bad credit doesn’t stick with you forever, and if you need to borrow money, there are still ways to get approved even with a low score. Here’s what you need to know:

Do You Have Bad Credit?

To determine what you’re eligible for and begin improving your credit score, you should know where you’re starting from. You can view your own credit report — on which the credit score is based — for free on AnnualCreditReport.com. Through April 2021, you are entitled to a free credit report weekly from each of the three main credit bureaus —Equifax, Experian, and TransUnion. 

Each lender sets its own standards for assessing credit, and one may judge your score differently from another, but you should have a general idea of where you stand among credit users. You can check your credit score for free through your online banking portal or credit card issuer, or purchase access from a credit bureau. 

Credit scores typically range from 300 to 850; FICO rates 300 to 579 as “very poor” and Vantage Score values anything from 300 to 600 as “poor” or “very poor.”

Credit RatingFICO Score Range
Very Poor300-579
Fair580-669
Good670-739
Very Good740-799
Exceptional800-850

Source

Credit RatingVantageScore Range
Very Poor300-499
Poor500-600
Fair601-660
Good661-780
Excellent781-850

Source

These ranges can greatly influence the amount of interest you pay on a loan. For instance, someone with a FICO Score of 500-589 will pay 16.4% interest on a new five-year auto loan, on average, while someone with a 690-719 score will only pay an average 5.39%. You can use this calculator from FICO to see how interest varies between different credit scores and loan types.

Another thing to keep in mind is you don’t have to have a history of misusing credit to end up with a low credit score. If you’re just starting out with no credit history, your thin credit profile can lead to a poor credit score too, making it difficult to gain access to products that can help you build stronger credit. It takes years of timely payments and healthy credit usage to attain a great credit score.

Exercise Caution

If you do have bad credit, be cautious about which lenders you turn to: potential scammers and illegitimate lending companies can view a low credit score as a target.

Look out for any company that guarantees you’ll qualify for a loan before even applying or that uses language like “Bad credit? No problem” and “Get money fast,” the Federal Trade Commission warns. These types of lenders could charge large hidden fees or even use your information for identity fraud.

Pro Tip

Bad credit can make you an easy target for predatory lenders. Be on the alert for any illegitimate companies or predatory lending offers, which could lead to more credit problems and mounting debt down the road.

 

Payday loans and title loan lenders are other common lending types that you should stay away from at all costs. These lenders often target consumers who have few credit and loan options. But they also charge astronomical interest rates which, for many borrowers, can lead to an ongoing cycle of unpaid, mounting debt.

By turning to predatory lenders, “You’re going to pay 300-400% APR, and that is devastating,” says Michael Sullivan, personal financial consultant at financial education nonprofit Take Charge America. By contrast, the current average APR (or annual percentage rate, the real yearly cost of your loan) is 14.52% for credit cards, and 9.5% for personal loans. 

How to Get a Loan With Bad Credit

Reach Out to Your Current Bank

If you have an established banking relationship with a financial institution, try leveraging that to score a loan, even with bad credit. 

“It is critical to have a relationship with a financial institution that will listen to your needs,” says Felicia Lyles, senior vice president of retail operations at Hope Credit Union, a community-development financial institution geared toward typically underserved populations. 

This may not be as useful a tactic with large, national banks, but it might at least serve to establish a starting reference point for what rates or products you may qualify for. You can then compare with other financial institutions. Smaller institutions such as credit unions and community banks may be more likely than national chains to work with you on finding a product that fits your needs, especially if the alternative is predatory payday or title loan lenders. Credit unions do have membership requirements, often based on your location, employer, or other criteria, but you may find these criteria easier to meet than you think — or you may find ways around them altogether. Use this locator to find credit unions in your area.

Find a Co-signer

Seek out a trusted person in your life—whether a parent, friend, or family member—who may be willing to co-sign on your behalf to guarantee your loan. 

This isn’t a decision someone should make lightly, though. Co-signing on someone else’s loan means that if the borrower defaults, the co-signer is responsible for paying. Not only must the co-signer be prepared to make the loan payments themselves, but they can also become responsible for any late fees or penalties, and their own credit score could be affected.

Co-signing can often be a dangerous financial practice, Jill Schlesinger, CFP, host of the “Jill on Money” podcast warns. “If someone cannot get a loan, usually there’s some reason behind it,” she previously told the Marketplace Morning Report podcast. “If a lender isn’t willing to extend money, why should you?”

If you decide to use this option, discuss all the details of your repayment with your co-signer beforehand, go over the details of your loan agreement, and look into your state’s co-signer rights. Your co-signer should be aware of all the risks involved, be prepared to repay the loan themselves, and make an informed decision about co-signing before applying for the loan.

Peer-to-Peer Lending

Peer-to-peer lending is an alternative to traditional loans. Instead of borrowing from a bank or credit union, you can use an online service such as Lending Club to match with investors willing to loan money to borrowers.

Loan terms vary, and you can often receive a lending decision within a short time. Your terms are still determined by your credit history, and you must pass a credit check to take out the loan, but peer-to-peer lending may help you qualify more easily or earn a better interest rate than a traditional bank loan, even with bad credit.

Generally, peer-to-peer lenders report to the credit bureaus, but double check the terms of your lending agreement so you can work on improving your credit score while making timely payments each month.

Payday Alternative Loans

Rather than risk astronomical interest rates and ongoing debt cycles with payday lenders, look into payday alternatives loans (PAL) offered by credit unions.

These small loans range from $200 to $1,000, with terms between one to six months, according to standards from the National Credit Union Administration (NCUA). You will pay high interest, which may even range above 30% (higher than even many credit cards charge) but if you develop a solid debt payoff plan, PALs can be a viable option—and still much more affordable than payday loans.

Credit-Builder Loans

If you don’t need immediate access to new money, a credit-builder loan can be a great way to build up a healthy payment history—a major factor in determining your credit score.

Instead of receiving cash up front which you pay back over time, you’ll have a set term and loan amount, during which you’ll make monthly installment payments. The lender reports these payments to the credit bureaus. Each month, this money will go into an account, which you can access at the end of your loan’s term. 

“What you’re actually doing is paying yourself,” says Cristina Livadary, CFP, of Mana Financial Life Design, a financial planning firm in Marina Del Rey, California. “Then at the end of your term, you get that money back, and you can use it however you want.”

Bottom Line

Accessing loans when you have bad credit is definitely an uphill battle, but it’s not impossible to find a lender, even as many tighten lending standards amid the ongoing recession.

If you need access to cash and you have bad credit, take time to examine your overall financial situation: work out a budget you can stick to, organize your debt balances, explore forbearance or hardship assistance, and develop a plan. And given today’s uncertainty, make sure any loan you’re considering is driven by actual need. You don’t want to accumulate more debt for expenses that can wait, like home improvements. Keep in mind your long-term financial health, too: build a small emergency fund if you have no financial safety net, and look into debt payoff strategies that might work best for you. 

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Bad Credit

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom | Fintech Zoom

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Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

Loans Bad Credit Online – Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom



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Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

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The government’s incentive to step in and bail out depositors when banks fail is clear from past experience.

By Anusha Chari & Amiyatosh Purnanandam

The failure of the Punjab and Maharashtra Co-operative Bank (PMC) in September 2019 shone a light on the limitations of India’s deposit insurance system. With over Rs 11,000 crore in deposits, PMC bank was one of the largest co-op banks. That the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance covered depositors, provided little solace when the realisation hit that the insurance amounted to a mere Rs 1 lakh per deposit.

The predicament of PMC depositors is, unfortunately, not an anomaly. Several bank failures over the years have severely strained RBI and central government resources. While co-operative banks account for a predominant share of failures, other prime examples include the Global Trust Bank and Yes Bank failures. These failures entail a direct cost to the taxpayer—the DICGC payment or a government bailout. More importantly, bank failures impose long-term indirect costs. They erode depositor confidence and threaten financial stability, presenting an urgent need for deposit insurance reform in the country.

A sound deposit insurance system requires balancing two opposing forces: maintaining depositor confidence while minimising deposit insurance’s direct and indirect costs. At one extreme, the regulator can insure all the deposits, which will undoubtedly strengthen depositor confidence. But such a system would be very expensive.

A bank with full deposit insurance has minimal incentive to be prudent while making loans. Taxpayers bear the losses in the eventuality that risky loans go bad. Depositors also have little incentive to be careful. They can simply make deposits in the banks offering high interest rates regardless of the risks these banks take on the lending side.

Boosting depositor confidence and reducing direct and indirect costs require careful structuring of both the quantity and pricing of deposit insurance. Some relatively quick and straightforward fixes could help alleviate the public’s mistrust while improving the deposit insurance framework’s efficiency.

India has made some progress on this front over the last couple of years. First, the insurance limit increased to `5 lakh in 2020. Second, the 2021 Union Budget amended the DICGC Act of 1961, allowing the immediate withdrawal of insured deposits without waiting for complete resolution. These are very welcome moves. Several additional steps could bring India’s deposit insurance system in line with best practices around the world. Even with the increased coverage limit, India remains an outlier, as the accompanying graphic shows.

The government’s incentive to step in and bail out depositors when banks fail is clear from past experience. However, these ex-post bailouts are costly. The bailout process also tends to be long, complicated, and uncertain, further eroding depositor confidence in the banking system. A better alternative would be to increase the deposit insurance limit substantially and, at the same time, charge the insured banks a risk-based premium for this insurance. Under the current flat-fee based system, the SBI pays144 the same premium to the DICGC—12 paise per 100 rupees of insured deposits—as does any other bank!

A risk-based approach will achieve two objectives. First, it will ensure that the deposit insurance fund of the DICGC has sufficient funds to make quick and timely repayments to depositors. Second, the risk-based premia will curb excessive risk-taking by banks, given that they will be required to pay a higher cost for taking on risk.

India is not alone in trying to address the issue of improving the efficiency of deposit insurance. The Federal Deposit Insurance Corporation (FDIC) recognizes that the regulatory framework governing deposit insurance is far from perfect and the United States is moving towards risk-based premia. The concept is similar to pricing car insurance premia according to the risk profile of the driver. The FDIC computes deposit insurance premia based on factors such as the bank’s capital position, asset quality, earnings, liquidity positions, and the types of deposits.

In India, too, banks can be placed into buckets or tiers along these different dimensions. The deposit premium can depend on these factors. It is easy to see that a bank with a worsening capital position and a high NPA ratio should pay a higher deposit insurance premium than a well-capitalized bank with a healthy lending portfolio. The idea is not dissimilar to a risky driver paying more for car insurance than a safe driver.

Risk-sensitive pricing can go hand-in-hand with the increase in the insured deposit coverage limits bringing India in line with its emerging market peers. In a credit-hungry country like India, these moves would build depositor confidence, possibly increasing the volume of deposits and achieving the happy result of the banking system channeling more savings to productive use.

Chari is professor of economics and finance, and director of the Modern Indian Studies Initiative, University of North Carolina at Chapel Hill and Purnanandam is the Michael Stark Professor of Finance at the Ross School of Business, University of Michigan

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5 Signs You’re Not Ready to Own a Home, According to a CFP

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The housing market has boomed over the last year, despite a global pandemic and millions of Americans struggling to make ends meet. 

Many people are spending less on entertainment, clothing, travel, and other discretionary purchases during COVID. Federal student loan borrowers have seen temporary relief from their loan payments. These expenses will most likely rise again after the pandemic, and many people who committed to a new home with a large mortgage will struggle to keep up. 

I often speak with clients and prospective clients who want to buy a home before they have a strong financial foundation. Buying a home is not only one of the largest purchases you’ll make in your lifetime, but it’s also a huge commitment that’s extremely hard to undo if you have buyer’s remorse

It’s important to make a thoughtful, informed decision when it comes to a home purchase. Before you take the plunge into homeownership, check for these signs that you’re not quite ready to buy. 

1. You have credit card debt

Credit card debt can be a drain on your monthly budget, and when combined with student loans and a car loan, it can lead to high levels of stress. 

Generally, more debt means higher fixed expenses and little opportunity to save for long-term financial goals. Your financial situation will only get worse with the addition of a mortgage. I always recommend that clients be free of credit card or other high-interest debt before they consider buying a home. 

To rid yourself of credit card debt, take some time to get a good handle on your cash flow. Take an inventory of your spending over the last six to 12 months and see where you can cut back. From there, develop a realistic budget that includes aggressive payments to your credit cards. 

There are several strategies to help you knock out credit card debt fast. Regardless of the method you choose, stick with the plan and track your progress along the way. Once you pay off your credit cards, you can allocate your debt payments to savings, which can help you avoid this situation in the future.  

2. You have bad credit

Bad credit is not only a sign that you may not be ready to take on a mortgage, it can also signal a high risk to

mortgage lenders
. A high-risk status results in higher interest rates and more strict requirements to qualify for a loan. A mortgage is one of the largest loans you’ll take out in your lifetime, and if you get behind on payments, you could lose your home. 

Just as with credit card debt, bad credit could be a result of past financial mistakes. Dedicating the time to repair bad credit and improve your credit score will help you beyond purchasing your dream home. 

Start by pulling a recent credit report from each of the three credit bureaus so you can review it for errors. Dispute any errors, address past-due accounts, and bring your overall debt balances down. It’s helpful to learn what has a negative effect on your credit score so you can avoid these mistakes in the future. 

3. You don’t have an emergency fund (or an inadequate one)

If you’re unable to save for a rainy day, you probably don’t have enough money to buy a house. Owning a home is a big responsibility, and unexpected expenses pop up all the time. In addition, you could lose your job, have a medical emergency, or another unexpected expense unrelated to the home. Maintaining an emergency fund is a good sign that you have discipline and are prepared for the responsibility of homeownership.

Many financial experts recommend saving at least six months of living expenses in an emergency fund. If you have variable income, own a business, or own a house, you should save more. To build an emergency fund, set money aside from each paycheck and automate transfers to make the process easier. Give your emergency fund a boost when you receive lump sums such as bonuses or tax refunds. Start by saving one month of living expenses and build from there. 

4. You don’t have separate savings for your home

I always advise clients to set aside savings for a home in addition to an emergency fund. It’s a bad idea to start homeownership with no savings. Whether you have unexpected expenses related or unrelated to the home, having no emergency fund after a home purchase will lead to unnecessary stress — and possibly more debt. 

When purchasing a home, you’re responsible for a down payment and closing costs. While a 20% down payment is ideal to avoid private mortgage insurance, a down payment of at least 3.5% is typically required. Closing costs can range from 2 to 5% of the home’s value. 

Also, you will have moving costs, costs to spruce up your new place (like new furniture or light cosmetic updates), and any initial maintenance and repairs. Be sure to budget for these items to know how much to save on top of your emergency fund. It doesn’t hurt to boost your emergency fund, too, in preparation for homeownership. 

5. You have a low savings rate

It’s much easier to develop good savings habits before you have a lot of responsibilities. To get on track for financial independence, several studies show that you should save at least 15% of your income. The longer you wait, the more you’ll need to save. 

If your savings rate is low before you purchase a home, it will most likely worsen after becoming a homeowner. Even if your mortgage is similar to your rent, ongoing maintenance and repairs, higher utilities, and homeowners association fees can wreak havoc on your budget. 

Take a look at your current savings rate and see if you’re on track for financial independence. If you’re saving less than 15 to 20% of your income, work to improve your savings rate before you consider buying a home. A strong savings habit can help you build your home savings fund faster and ensure that a home purchase doesn’t impede your long-term financial goals. Finally, understand how much house you can afford so you can avoid being house poor. 

Buying a home can be rewarding, and when done the right way, it’s a way to build wealth. Before you decide to buy a home, it’s important to understand your numbers and ensure that you’re ready for the commitment. Without preparation, your dream home could be detrimental to your long-term financial goals.

Chloe A. Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta, Georgia and serving clients nationwide.

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