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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

European Regulator Worries Banks Are Ignoring Borrower Troubles

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The European Central Bank is worried lenders in the eurozone aren’t properly evaluating the impact of the coronavirus pandemic on the financial health of borrowers, a problem that could result in a sudden cascade of defaults.

Andrea Enria,

head of banking supervision at the ECB, said banks are setting aside less money to cover for loan losses than peers in other countries, including the U.S. He added that the provisions are below levels reached during the financial crisis and short of the levels models suggest are required.

“The way in which banks are preparing for asset quality deterioration varies widely and could, in some cases, be insufficient,” Mr. Enria said Thursday.

He expects the impact of renewed lockdowns will be reflected in banks’ fourth-quarter results and through 2021. Several eurozone banks are due to report their annual results next week.

The true health of eurozone borrowers has become harder to track due to the amount of financial support from the ECB and the region’s governments, which includes payment holidays on existing loans. In Italy, for instance, over a quarter of loans to businesses are under payment moratoriums. In Portugal, half of the credit to companies in the hospitality and restaurant sectors are under the program.

State guarantees on loans have also incentivized eurozone banks to continue lending, including to small companies that would likely go bust without that help.

Mr. Enria said that while the support is likely helping banks to keep their loan books healthy, there are signs lenders aren’t properly looking at the personal situation of the borrowers who received support.

“Since March last year we told banks that they should develop additional indicators to try to understand the quality of their customers and to see through the moratoria,” Mr. Enria said. “We are not seeing a lot of that happening,” he said.

The ECB earlier last year said bad loans in the eurozone could soar as high as €1.4 trillion, equivalent to $1.7 trillion, if the economies were to contract more than expected, a scenario the central bank said was severe but plausible. That amount would be more than during the aftermath of the financial crisis more than a decade ago.

The ECB said the probability of that scenario is lower now, but “significant uncertainties remain in the short to medium term.”

Most banks were able to keep their capital levels stable through last year, although nine have taken advantage of looser regulatory requirements and ate into their buffers, the ECB said Thursday without naming the lenders.

The biggest concern for regulators is that low profitability—and a potential flood of losses from bad credit—could quickly deteriorate those capital levels.

Write to Patricia Kowsmann at [email protected]

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How long do offers last, and what if I have bad credit? We answer the most-asked mortgage questions

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Forget the eyes – nowadays, it is our internet searches that provide a window into the soul.  

We often turn to search engines to ask the questions that are on our minds, whether we’re just looking for a quick answer or because it’s something we are embarrassed to ask in person. 

Now, Britons’ most common mortgage questions have been revealed, thanks to a new analysis of Google searches.  

Many of the mainstream lenders are able to offer a mortgage within 2-3 weeks of an application being submitted, according to the mortgage experts we spoke to

Many of the mainstream lenders are able to offer a mortgage within 2-3 weeks of an application being submitted, according to the mortgage experts we spoke to

Comparethemarket.com looked at search data from the last twelve months, and discovered that the most asked mortgage question, with 20,960 searches, was ‘How long does a mortgage application take?’

Britons also wanted to know how long a mortgage offer lasted for, how to get a mortgage with bad credit, what an interest only mortgage was, and what a lifetime mortgage was. 

Applying for a mortgage can sometimes be complicated, and there is often a lot of jargon to contend with – so it is not surprising that people search online for more information.

This is Money asked Mark Harris of mortgage broker SPF Private Clients, Nicholas Morrey of mortgage broker John Charcol and a spokesperson from the Mortgage Advice Bureau to help provide answers to the five most-asked questions.

How long does a mortgage application take?

The most common mortgage question on Google, this is particularly relevant at the moment given that some buyers are keen to complete before the stamp duty holiday ends on 31 March. 

But the answer depends on the type of mortgage application being submitted, according to Harris.

For example, a product transfer – where you stay with your current lender but move to a new deal – can take a matter of days, whilst a more complex mortgage application can take weeks.

‘Once the application is submitted, a lot depends on the lender and the complexity of the application – it may take anywhere between one day to two weeks for an initial assessment to take place,’  Harris said. 

If you’re self-employed or the mortgage valuation requires a surveyor to visit the property in person, then you are likely to face further delays. 

A firm mortgage offer will follow once your application has been fully reviewed and an acceptable valuation received.

The experts we spoke to said that typically, it would to take two to three weeks from application to offer – but the pandemic has meant that these timescales have been stretched. 

‘Unfortunately, during the Covid-19 pandemic, lenders have suffered from staff and resource issues and tasks are taking longer to complete,’ said Harris.

‘Also, given the effect on employment and income, lenders are scrutinising applications in greater depth to see how applicants have been affected.’ 

How long does a mortgage offer last?

In most cases mortgage offers last for six months, although some offers will only last for three months.

‘If the offer expires, lenders will sometimes agree to an extension – although this will sometimes require a re-assessment by the lender,’ said Morrey.

A typical mortgage offer will last for six months, but this can sometimes be extended

A typical mortgage offer will last for six months, but this can sometimes be extended

‘For example, the original deal may no longer be available, or a new valuation may be required, or the lender may wish to re-assess your income and outgoings.’

Where an application involves a new-build property, the offer may last longer – potentially up to 12 months, according to Harris.

‘Borrowers should be aware that some new builds have completion deadlines that may not coincide with offer expiry dates,’ he said.

How to get a mortgage with bad credit?

Some lenders will not offer mortgages to people with a history of bad credit, and this was something that Google searchers wanted to know how to get around. 

Lenders that are willing to do so often charge a higher interest rate, to reflect the increased level of risk.

‘When getting a mortgage with bad credit, you can expect to borrow less and to pay more in interest in comparison to someone who has an exemplary credit record,’ explained the spokesperson for the Mortgage Advice Bureau.

Having bad credit may mean you are not able to borrow as much on your mortgage

Having bad credit may mean you are not able to borrow as much on your mortgage

‘High street lenders are generally averse to dealing with those who have bad credit, which can make it pretty difficult.

‘When you apply for a mortgage, it can register on your credit file – and if you apply to a number of lenders to see if they will lend to you, it may be doing additional damage to your credit score.’

‘Your best option, according to Mortgage Advice Bureau, is to contact an established and experienced mortgage broker.

‘They will have access to contacts and deals that are exclusive and not available to the general public. The mortgage broker will carry out a ‘soft’ credit check first, so your inquiry doesn’t negatively impact your credit score.’ 

What is an interest-only mortgage?

Another common question on Google concerned interest-only mortgages. So what are they? 

When borrowing for a home, you can either opt for a repayment mortgage or an interest-only mortgage.

With a repayment mortgage, you will pay back a part of the loan, as well as the interest, each month until you eventually pay off the mortgage.

With an interest-only mortgage, you will only pay the interest each month, with the loan amount remaining the same.

‘It means your monthly payments will be lower but, at the end of the mortgage term, the full amount you borrow is still outstanding and you have to pay the lender back everything at that time,’ said Morrey.

‘When applying for an interest-only loan, the borrower must demonstrate that there is a clear and credible strategy in place to repay the capital,’ added Harris.

What is a lifetime mortgage?

A lifetime mortgage is a mortgage secured on your home, with the loan only being repaid when you pass away, go into long-term care or sell the property.

Two examples of this are retirement interest-only mortgages and equity release mortgages.

Equity release allows you to access some of the equity in your home via a lifetime mortgage

Equity release allows you to access some of the equity in your home via a lifetime mortgage

‘Lifetime mortgages often have fixed rates of interest, and in the case of equity release mortgages, the fixed rate is for life and not just two or five years,’ explained Morrey.

He added: ‘They should not be confused with lifetime tracker mortgages, which track a specific index such as the Bank of England base rate – these will likely have an end date and won’t be for a ‘lifetime’ in itself.’

There are strict lending criteria, with the amount you can you borrow depending on your age.

‘Seeking expert financial and legal advice is crucial for this type of mortgage,’ said Harris.

‘An adviser covering both equity release and standard mortgages would be most useful as they can assess the most suitable route forward.’

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

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What is a Subprime Mortgage?

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What is a subprime mortgage? If you’re asking this question, chances are good you’re either trying to borrow for a home with poor credit or you’ve been offered a loan you’re concerned is a subprime loan. We’ll explain the answer to the question “what is a subprime mortgage?” and discuss some of the risks and alternatives.

What is a subprime mortgage?

Prime loans usually offer competitive interest rates to well-qualified borrowers. A subprime mortgage is similar to a conventional mortgage, except it has a higher interest rate. Subprime loans are geared toward borrowers with bad credit who can’t qualify for a prime mortgage at the best rates. Lenders take a bigger risk with subprime loans, so they charge substantially higher rates due to the borrower’s poor credit history.

If you have a credit score below 620, you may not be able to qualify for a prime mortgage, but you might get a subprime mortgage.

Types of subprime mortgages

There are multiple types of subprime mortgage loans. However, one particular type of loan — an adjustable-rate mortgage — is especially common for subprime mortgages.

Adjustable-rate mortgages

Many subprime mortgages are adjustable-rate mortgages, or ARMs. The introductory rate on an ARM is fixed for a limited time. For example, a 5/1 ARM provides a fixed rate for five years. After that, the rate adjusts based on a financial index.

That means your interest rate may go down — but it could go up, too. ARMs carry more risk than fixed rate loans. If interest rates rise, monthly payments could increase. If you take out an adjustable loan, find out how high your payment could go. Don’t assume you’ll always be able to refinance or sell your home before it adjusts.

Fixed-rate mortgages

With fixed-rate subprime mortgages, the interest rate remains the same for the entire repayment period. Since the rate doesn’t change, payments don’t change.

The important question is, what is a subprime mortgage interest rate you’d qualify for? You need to make sure the rate is reasonable and that monthly payments are affordable.

Shop and compare rates from multiple mortgage lenders for poor credit to find the best subprime loan rates. And use a mortgage calculator to see how much your monthly payment would be for any loan you’re considering.

Interest-only mortgages

Interest-only mortgages allow you to pay only interest for a limited time, such as the first five years. This makes monthly payments more affordable, but you don’t make progress in reducing your loan principal.

At the end of the initial period, you’ll begin paying both principal and interest. Your payments may rise substantially because you’ll have a shorter timeline to pay your loan off. If you took a 30-year mortgage and only paid interest for the first 10 years, you’d have just 20 years to pay off your entire principal balance.

Most interest-only loans are also structured as ARMs, so you take the added risk of rates going up and payments rising.

Dignity mortgages

Dignity mortgages are a specific type of subprime loan offered by some lenders. With this type of mortgage, you’ll initially have a high interest rate. But if you make on-time payments for a period of time, your interest rate will eventually be reduced to the prime rate.

Subprime mortgage risks

It’s important to also consider if you’re willing to take on the risk of this type of loan. Some of the biggest risks include:

  • Interest costs will be high: You will pay significantly more mortgage interest over time than if you took out a conventional mortgage.
  • Finding a lender may be difficult: Not all mortgage lenders offer loans to subprime borrowers. You could be limiting your potential loan options.
  • Payments could increase: If you choose an ARM, you face the risk of interest rates going up and payments rising.
  • Foreclosure is possible: If you don’t pay your subprime mortgage loan, your lender will foreclose. Your credit could be severely damaged.

Lenders are required under Dodd-Frank financial reform laws to conduct an “ability-to-repay” assessment. This ensures borrowers are capable of paying back their loans. These mandates can reduce the risk for borrowers. But the bottom line is buying a house with bad credit can create a host of complications.

Alternatives to subprime mortgages

You may be wondering if there are other options. The good news is that there are multiple solutions for borrowers with bad credit. Some of the best options include these government-back loans:

  • FHA loan: FHA lenders often work with borrowers with lower credit. FHA loans are available to borrowers with credit as low as 500 as long as they make a 10% down payment. Borrowers with scores of 580 or higher can get approved with a 3.5% down payment.
  • VA loan: A VA mortgage loan is available to eligible service members and veterans regardless of their poor credit history. The VA doesn’t set a minimum score, but some lenders do.

USDA loan: These allow you to purchase eligible homes in rural areas. More stringent underwriting is required to qualify borrowers with credit scores below 640. But it may still be possible to qualify.

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