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How To Get A Personal Loan For Bad Credit – Forbes Advisor

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When you encounter a major expense you can’t afford to pay for with savings, such as a car repair or medical procedure, it may be necessary to take on debt. A common financing option is a personal loan, which provides a lump sum of cash that’s paid off in monthly installments. Personal loans can also be used to consolidate high-interest debt.

In the application process for personal loans, lenders scrutinize your credit report to assess your risk and ability to repay. If your credit isn’t in great shape, you may struggle to land a decent interest rate on a personal loan—or get approved at all.

Here’s the good news: There are some lenders that specialize in personal loans for bad credit, and you can increase your chances of approval if you take time to improve your credit first.

Can You Qualify for a Personal Loan with Bad Credit?

When it comes to underwriting criteria for personal loans, each lender has its own set of standards. You’ll be hard-pressed to find a lender that doesn’t examine your credit score as part of the qualification process. According to Marcus, an online lender that’s part of Goldman Sachs, it can be difficult to qualify for a personal loan if your FICO score is below 660.

Some lenders have stringent borrowing criteria, and it’s especially hard to get approved for personal loans from traditional banks if your credit isn’t in tip-top shape. Fortunately, some online-only lenders are more flexible and willing to offer personal loans for bad-credit customers.

Your credit report isn’t the only factor that’s considered when you apply for a loan, which can either help or hurt you. For example, lenders may want to review information about your income and employment, plus your debts and your assets to get a better sense of your finances.

An increasing number of personal loan lenders now also use alternative data in the approval process, according to credit bureau Experian. This means they look at more factors beyond your credit report, such as utility payments or bank account information, which can help borrowers with bad credit or a thin credit file.

Bad Credit Personal Loan Costs

Depending on the lender, the loan terms and the shape of your credit and finances, the costs of a personal loan can vary drastically. Across the board, though, personal loans for bad credit cost more than those for borrowers with high credit scores.

The current average interest rate for 24-month personal loans is 9.50%, though for borrowers with bad credit, it can be far higher, according to the Federal Reserve. This is a bit lower than the average credit card interest rate, which currently hovers between 14% and 16%.

If you take out a personal loan through a traditional bank, you may not have to pay origination fees. However, it’s difficult to qualify for a bank loan if you don’t have excellent credit.

Many online lenders that are more open to approving loans for bad credit will charge origination fees that add to the cost of the loan. These fees are charged as a percentage of the total loan amount, which is factored into in the annual percentage rate. Some lenders take this origination fee from your loan amount when you receive it. The worse your credit, the higher the fee is, since you’re deemed riskier.

Origination fees or not, it’s important to understand that your credit score plays a huge role in determining your loan’s interest rate. Those with excellent credit get the lowest rates, while those with worse credit scores get higher rates. The amount you’re borrowing and the term of the loan also impact your rate.

Keep in mind that the higher your interest rate, the more money you’ll pay in interest fees over the life of the loan. For example, on the low end, traditional bank HSBC offers personal loans with interest rates as low as 5.99% and with no origination fee.

Online lender Lending Club offers loans to those with lower credit scores, but interest rates are higher and borrowers also pay origination fees of 2%-6%, making the total APR anywhere from 10.68% to 35.89%. Someone paying upward of 30% in interest will have far higher lifetime costs than a borrower paying 6%, even for the same loan amount.

How to Get a Better Personal Loan Interest Rate

The single best way to nab a lower interest rate on a personal loan is to improve your credit. If your lender charges an origination fee, improving your credit can also mean paying a smaller fee. Once your credit is strong enough, you may even qualify for a lender that doesn’t charge an origination fee.

It can take time and effort to improve your credit, and if you need a loan urgently, you may not have the luxury of waiting. But if you can take time to work on your credit before you apply, you might get a better personal loan interest rate and save significantly over the life of the loan.

How to Get a Bad Credit Personal Loan

Many traditional banks don’t offer personal loans, and those that do tend to have strict credit criteria. You may be better off applying with a credit union or an online-only lender, some of which specialize in bad credit loans.

Some banks and credit unions allow online application, or you can opt for an online-only lender, which may offer faster approval and funding. Take some time to compare lenders, since borrower requirements, loan amounts, terms and fees vary.

Will Applying for a Personal Loan Affect My Credit?

Lenders often allow you to get prequalified for a personal loan before completing a full application. Look for language like “check your rate” or “see your offer,” which signals the prequalification process for a bad credit personal loan.

You should also see verbiage that your credit won’t be affected. That’s because a loan prequalification is considered a soft inquiry, which allows a lender to review your credit report without harming your credit score.

If you are successfully prequalified, you’ll receive an initial loan offer, though it’s not a guarantee you will be approved. You’re also not required to accept the offer, so you can get prequalified with multiple lenders to compare costs without it affecting your credit.

If you want to move forward with a loan, you then complete a full application. This usually requires additional financial documentation and a closer look at your credit report. That results in a hard inquiry, which can temporarily ding your credit by a few points.

Once you get approved for a personal loan, it can impact your credit in a few ways, both good and bad. On the plus side, if you don’t currently have a loan, adding one to your credit report can benefit you by increasing your credit mix. Having multiple types of accounts, such as both installment loans and forms of revolving credit (like credit cards) can help your score.

When you make on-time loan payments, you also help boost your credit since your repayment history is the biggest factor in your credit score. If you take out a bad credit personal loan and are diligent about paying your monthly bills on time, you can build a positive credit history. The reverse is also true; if you make late payments on your loan or miss payments altogether, you can damage your credit.

Alternatives to a Personal Loan for Bad Credit

A bad credit loan isn’t the only way to cover costs in a pinch. Here are some of the other options you may encounter:

  • Credit cards. A personal loan gives you a lump sum of cash that’s repaid in monthly installments with interest over a set term. This makes it best for a single large purchase. A credit card uses revolving credit, giving you a line of credit that you can pull from as needed and only pay interest on what you use. As you pay off your balance, you can reborrow that money. Credit card interest rates are typically higher than personal loans, but they offer more flexibility if you need to make multiple smaller purchases over time.
  • Lines of credit. Lines of credit are also a form of revolving credit. They come as both unsecured, or as secured, like a home equity line of credit that uses your house as collateral.
  • Payday loans. Payday loans provide small, short-term cash, but interest rates are sky-high, and borrowers often find themselves stuck in a cycle of debt. Payday loans are often considered a form of predatory lending and should be avoided if possible.

Avoiding Bad Credit Personal Loan Scams

When you’re facing a financial emergency and need money fast, you may be vulnerable to scams, especially if your credit isn’t great and you may not qualify for traditional loans. Some bad actors take advantage of consumers in this position by peddling bad credit personal loan scams.

Here are a few red flags to watch out for:

  • You’re asked to pay upfront fees. Legitimate personal loans do not require you to pay fees upfront or pay an application fee.
  • You’re told your approval is guaranteed or no credit check is required. This is too good to be true, as reputable lenders will need to review your credit and can’t guarantee you’ll be approved before that process.
  • You’re asked to make unusual types of payments. Legitimate lenders will never ask you to pay with a prepaid debit card or gift card.
  • You receive an unsolicited offer. Sometimes real lenders will send out loan advertisements, but scammers sometimes use this method to find victims. If you’re in the market for a loan, don’t just go with someone who came to you; do your research and apply directly with a reputable lender.

You should also make sure the lender has a physical address somewhere (not a P.O. box) and has a secure website. Also, be wary of lenders who pressure you into acting immediately.

Personal loans can be an optimal way to finance some expenses or consolidate debt, but they may not be an option with certain lenders if your credit report isn’t strong. Some lenders offer bad credit loans; just make sure to read the terms closely and know that your loan may come at a higher cost.

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Bad Credit

How to Avoid a Prepayment Penalty When Paying Off a Loan | Pennyhoarder

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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.

Pro Tip

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:

  1. The loan has a fixed interest rate.
  2. The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
  3. 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.

Pro Tip

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.

Pro Tip

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. Read her 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.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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How Can I Prequalify for a Personal Loan? A Guide

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When you are in need of money quickly, you very likely don’t want to sit around pondering a bunch of different options. You want to find the option that works best for you and utilise it. Unfortunately for so many people around the country, it can be difficult to get their hands on the money they need due to them having a bad credit score, or even no credit score at all.

How Can I Prequalify for a Personal Loan?

Photo, Varun Gaba.

Your credit score is thought of as being pretty important, as it shows your financial trustworthiness to financial institutions like banks, credit card companies, lenders, and more. Your credit score is one thing that will usually be considered by just about any company you apply for a loan through, so keeping a close eye on your credit score is imperative for your financial life.

No matter what your credit score looks like, knowing how you can prequalify for a personal loan can be a comforting feeling when you are in need of quick cash. After all, when you are eligible for personal loan prequalification, you feel a little better going into the loan process knowing you won’t have to wait around for a loan decision.

How is Pre-qualification Decided? Prequalifying for a personal loan can depend on several different factors that you will have to keep in mind, and it will vary greatly depending on the lender you are applying through. Here are two of the things you will need to keep in mind when it comes to your loan that could affect whether or not you prequalify for the loan.

— Your credit score; Yes, this is always going to be something you are going to need to think about. Depending on the financial institution or lender you are going through, you can bet that your credit history and score will play a huge part in whether or not you prequalify.

— The amount of your loan; How much money you plan on borrowing from the lender or bank is also going to play a part in deciding whether or not you prequalify.

To get the most out of your search for a lender that you could prequalify with, think about applying with more than just one lender. This way, you might get several pre-qualification offers, and this will allow you to sort through the lenders and decide which one works best for you.

How Can I Prequalify for a Personal Loan?

Photo, Christina @ wocintechchat.com.

The Pre-qualification Process: No matter where you are trying to prequalify for your loan through, you will find the process to be pretty simple and largely similar across most lending platforms. You will need to provide some information to the lender that will help them decide whether or not to prequalify you.

How Can I Prequalify for a Personal Loan?

Photo, Windows.

Some of the information you will need to provide includes:

— Your full name; You will want to make sure you provide your full legal name so you can make the process simple for yourself and the lender. Depending on the lender, you might also be asked to provide images of your government issued ID or driver’s license to validate your identity.

— Your income and information on your job; Your income and employment status are often considered over your credit score when it comes to pre-qualification for loans, especially if you are applying for a personal loan through a lender who deals with customers with bad credit or no credit.

— The loan amount you want; Of course, you will have to include the amount of money you would like to borrow. Make sure it is something reasonable, and something that you can realistically pay back on time.

What Will the Lender Do? If you are trying to prequalify through a lender who specialises in bad credit clients, then you won’t have to worry about your credit score being negatively affected by taking out your loan. However, if the lender reports to the credit bureaus, your payments could still make an impact on your credit score.

If not working with a specialised lender, you might find that the lender will do a soft inquiry on your credit when going through the pre-qualification process. No worries here, as this doesn’t put any dents in your score. If you prequalify for the loan you are looking for, you should get an alert via email from the lender of your choice.

The Money You Need: Hopefully, you will have prequalified for the loan you are looking for so you can ensure you have access to the money you need, when you need it. Whether you’re going through some unexpected circumstance in life or just need money to pay something off quickly, knowing you are prequalified for the loan you need is a comforting feeling, allowing you access to the cash you need for whatever you need it for.



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