Bad credit borrowers can have a hard time of it when searching for loans with good terms. It is a consequence of their bad credit history, and one that usually means costly compromises must be accepted to get an application approved. But there are affordable options available for those seeking even unsecured loans with bad credit.
The reason why these opportunities exist is that a low credit score is no longer recognized as an accurate indication of risk. Honest borrowers have been hit by the financial crisis of recent years, and find themselves with low scores. As a result, loan approval is more difficult, but getting loan approval with no collateral is much harder.
Collateral is a hugely significant aspect to a loan application, but it can be hard to get when the required loan is large. After all, who has an item worth $15,000 or $20,000 to put up as collateral that they may be willing to lose. So, for most of us, an unsecured personal loan is the best we can hope for.
Secured vs Unsecured: Different Terms to Expect
There are 3 sources that applicants can seek loans from: traditional lenders, like banks; lending firms that specialize in loans but no other financial activities; and online banks and lenders. Each offers very different terms and conditions to those applying for unsecured loans with bad credit.
Typically, of course, the terms of a secured loan are going to be much better. Interest rates are lower and loan sizes are limitless, with the only condition being that the value of the collateral matches the sum being borrowed. Certainly, loan approval with no collateral is much harder because of the degree of risk the lender must accept.
Because of this risk, the interest rate charged is higher. This in turn increases the cost of the loan, which directly affects its affordability, which sometimes means the size of the approvable unsecured personal loan is lower than the sum needed.
The Problem With Traditional Lenders
There was a time when traditional lenders were arguably the best sources for financing. But in recent years, a large portion of existing loans had to be written off by lenders because borrowers were unable to maintain repayments. The result is that banks and credit unions are nervous about granting unsecured loans with bad credit.
Unsurprisingly, these large lending institutions have tightened up their lending policies, introduced stricter terms and penalties for late payments. Interest rates have risen for bad credit borrowers, often making the loan itself too expensive, and loan approval with no collateral has become extremely difficult to attain.
In fact, traditional lenders are less likely to lend than ever before, even to applicants with good credit scores. The only way for many people to get the green light on an unsecured personal loan is to look to the alternative lenders, usually to be found online.
Advantage of Alternative Lenders
The Internet has brought a world of lending options to consumers, and that has made the chances of getting an unsecured loan with bad credit, but at affordable terms, much more likely. There are two types, however.
Subprime lenders operate online and approval is almost guaranteed with them, even for large loans. The reason they can afford to accept the risk of granting loan approval with no collateral is that their interest rates are competitive, but the term is long (25 years). So, repayments are kept affordably low, but over the lifetime of the loan a large amount of interest is paid.
Private online lenders charge lower interest rates and shorter repayment terms, but the loans are smaller. Payday loans are anything from $100 to $1,500, while larger unsecured personal loans of between $2,000 and $20,000 boast competitive terms compared to traditional loan terms.