In today’s uncertain economic climate, more and more families are finding themselves crunched for cash. For many households, this means turning to short term loans. If you are considering taking out any sort of loan, it’s important to understand the different types of loans and their ramifications.
Most loans involve collateral of some kind. Collateral is a piece of property that secures the loan; if a borrower fails to pay back the loan, the creditor can seize the collateral. The classic example of this is a home mortgage. If a homeowner doesn’t pay their mortgage, the bank takes back (i.e. forecloses on) the home, which functions as the collateral on the loan.
Other loans, however, are uncollateralized. Because there is no piece of property for the lender to seize, these loans are viewed as being much riskier, which generally leads to higher interest rates. If you have a bad credit score, these rates will likely be even higher, or you will be denied completely.
If you find yourself in the position of having bad credit and needed an unsecured loan, it is important to be realistic. It is unlikely that you will get a loan with favorable terms. Instead, look for a loan that will help you get back on your feet, and try to avoid being in the situation of needing an unsecured loan in the first place.
The first thing to consider is that you might be able to get a secured loan with collateral. If the amount of your loan is small, then a variety of possessions might qualify as collateral on your loan. Consider your car or any valuable possession; check with your bank or creditor to see if something you own can qualify as collateral.
If you truly don’t have any collateral, your best option might be to have a co-signer. If you can find a friend or colleague who has a solid credit score, that person can take dual responsibility for your loan. Under this agreement, if you fail to pay back your loan, your co-singer becomes responsible for your payments. This shared responsibility might allow a lender to approve a loan that would otherwise not be possible.
Your final option is probably a payday loan. Payday loans are unsecured loans (meant to last until your next payday) given out by companies that usually specialize in short-term loans. Be careful, however. Many payday loans have exorbitant interest rates, punishing terms, or hidden fees.
All in all, it is best to simply not need an unsecured loan. If you do need one, and you have bad credit, follow the steps above and you are likely to find the best outcome possible.