Applying for a loan can seem daunting, but it may be the best option you have during an emergency such as illness, a damaged car that needs repair, and more.
However, when your credit falls into the bad credit category, you may find it hard to qualify for a traditional bank loan. The good thing is there are lending options available that can let you borrow some cash despite your poor credit score. These include:
- Payday loans
- Personal loans
- Peer-to-peer lending
Moving forward, let’s learn more about these three loan options and determine which of them can be the best one for you in times of unexpected financial crisis.
A payday loan is a short term type of lending offered by non-bank lenders. The amount you can borrow is typically based on how much you will earn on your next paycheck. It is an ideal option for people who have difficulty making ends meet every month.
This loan option is also a good idea for those individuals who have a poor credit history since payday loan lenders don’t look at your credit score when deciding if you’re qualified for the loan or not.
Furthermore, one of the great things about this loan option is its quick and easy process. In fact, most lenders target a one to two hours approval time so that you can immediately use the money during an emergency. But if your application is denied, they will immediately inform you so that you will have more time to look for other resolutions.
However, a payday loan also has its downsides. It carries an interest rate of up to 400%, which is significantly high compared to other loan options. As such, you will have a hard time paying it off and may fall into a vicious cycle where interest rates continue to rise until the time you pay it off in full.
Another loan option that can be available for people with bad credit is the personal loan. This type of lending is an installment loan issued by credit unions, banks, and online lenders. There are different types of personal loans that you can avail of, depending on your financial situation. Here are some of them:
- Secured Personal Loan. A secured personal loan requires the borrowers to put up an asset such as property, car, or even jewelry as security to qualify for a loan. Thus, if you fail to make the required repayments, lenders can take possession of the assets you used as collateral.
- Unsecured Personal Loan. If you don’t have valuable assets that can be used as collateral, you can take out an unsecured personal loan. Here, you don’t have to provide an asset to the banks or lenders for security. However, you may need to convince the lender that you can make the repayments on the loans by providing them proof of income through your payslips.
- Student Loan. University students who are on a very tight budget can rely on a student’s personal loan to help them purchase textbooks, laptops, and other educational expenses. It can be put off for up to five years, and some banks don’t require an upfront fee on this type of personal loan.
- Overdraft. If you have unexpected expenses or emergencies, an overdraft or line of credit is the one for you. This personal loan allows you to overdraw your account to a certain amount established by the lender or bank. On top of that, you will only be charged to pay the interest of the money you used and not the interest of the overall amount you borrowed.
Additionally, you can borrow larger amounts of money on personal loans compared to payday loans. Aside from that, it usually has a longer repayment time, and it’s not unusual for you to repay your personal loans over 12 to 84 months.
The last loan option on our list for people with bad credit is the peer-to-peer lending, which is also known as P2P or marketplace lending. This type of lending enables you to get a loan directly from other individuals, eliminating financial institutions as the middleman.
P2P lenders are those investors who want to get a better return on their savings than what they can get from their bank account. They usually offer lower interest rates compared to other lending institutions.
So, if you are looking for an alternative option to traditional bank loans with lower interest rates, peer-to-peer lending might be the one you are looking for. The requirements for this loan option will vary, but most P2P lenders might not check your credit history.
In times of emergency, loans can help you with your unexpected expenses. However, you need to be sure that you can repay a loan before signing any contract to avoid trouble in the future. As such, you can use the loan payments calculator as a guide to possible repayment figures. Make sure you know the essential information when weighing up the rewards and risk of getting various types of loans.