Latoya Scott erased almost half her debt when she declared bankruptcy. She thought she would never be able to own a home. But she kept paying down her debt month by month.
We’ve all heard that no credit is worse than bad credit. And bad credit is, well, bad. But everyone has rainy days when we need money now. So what are your options when your credit is less than amazing?
Low-interest online installment loans offer the perfect solution to those with less than optimal credit. Instead of taking on debt from multiple sources, you can take out one installment loan to cover all the bills you’re short on this month.
Initial Considerations Regarding Your Credit
Interest on separate payday loans online can fluctuate from month to month. An installment loan lets you know how much your payment will be every month. No surprise fees or increased interest rates. But there is still a lot to consider before taking out any loan.
This article will walk you through how you can still get financing when you need it. You can still make those big purchases: tuition, rent, and emergency medical bills while improving your credit score.
Secured or Unsecured
Debt comes in two forms: secured and unsecured. The major difference between these two is collateral. A secured loan, like a mortgage, will require some kind of collateral on top of a good credit score. Unsecured debt only requires a credit check.
Most installment loans are unsecured personal loans. That’s why they are better suited for those of us with limited or bad credit. It comes down to risk. With unsecured debt, the lender takes on more risk as there is no collateral to collect in the case of default like there is with secured financing.
So why would a lender bother with unsecured installment loans when the risk for them is so high? Interest on unsecured loans is higher so the profit margin is better. Like credit cards, interest rates on installment loans are listed as their annual percentage rate (APR).
Most installment loans online range anywhere from 5-40% APR depending on how much you’re borrowing and how fast you’ll be paying it back. Online installment loans make it even easier to get the money you need than a similar loan from a bank with physical locations, like Wells Fargo.
“How Is My Credit Score Calculated?”
With all this talk about how your credit score impacts your ability to take out a loan, what even goes into a credit score? Good question. For many, a credit score is this mysterious number that we hope is healthy when we need it for something, like buying a new car.
The five factors that affect your credit score are:
- New credit: 10%
- Types of credit: 10%
- Length of credit history: 15%
- Payment history: 35%
- The amount owed: 30%
As you can see payment history is the biggest determining factor. So when you take out an installment loan for bad credit, be sure you will be able to afford the monthly payment AND the interest. It also affects your debt-to-income ratio, a number that tells lenders how risky loaning to you is.
Debt-to-income ratio is much easier to calculate than a credit score. Divide your monthly debt payment by your monthly income to see what your ratio is. The Consumer Financial Protection Agency recommends a ratio no higher than 43%.
You’ll find that most lenders start to become hesitant around a 36% ratio. There are only two ways to bring your ratio down, either make more money or find a way to bring down your monthly debt payment.
The Early Bird Doesn’t Always Get the Worm
Another aspect of installment loans to consider are prepayment penalties. Because lenders make their money off the interest of your loan, paying your loan back early means less profit for your lender.
So if you took out a three-year installment loan and after two years have enough money to pay it back in full, you may encounter a prepayment penalty fee.
This is why it’s important when choosing the duration of your personal loan no credit check to set a time no longer than what you need to be able to repay the loan. It can be tempting to take out more money than you need or give yourself more than enough time to pay it off. But this could mean you paying more interest than you had to over the long run.
With that being said, here are five questions you should ask yourself before choosing an installment loan lender:
- How much interest will I pay?
- Will I be penalized for prepayment?
- Will I need collateral (secured/unsecured)?
- How long will it take me to repay the loan?
- Are the payments amortized?
That last word may be new to you. Any trusted installment payday loan no credit check should have the payments amortized. This means that you’re paying back both the principal and interest. Some predatory lenders will not amortize your payment. You’ll only be paying the interest on the loan, potentially keeping you in debt forever.
Now that you know some of the pitfalls, let’s check out some of the popular installment loan providers.
The Lending Club
The Lending Club is one of the most established names in the installment loan industry. You can register and have your first online loan within a few minutes. Let’s take a look at some of the features the Lending Club offers its customers.
Founded just 13 years ago, the Lending Club is the world’s largest peer-to-peer lender. That means they take the banks out of the equation. Instead of jumping through hoops to borrow some of the bank’s money, peer-to-peer financing lets you borrow money directly from the club’s investors.
The club only makes money off the fees they charge both borrowers and investors. Any interest you pay goes right to the investor after processing fees. With a minimum investment of $25 for lenders, there is a lot of available cash for borrowers.
On Soft Credit Checks
A soft credit check that doesn’t affect your credit score is the first step to getting your Lending Club loan. Based on this check, the club assigns you a risk score. A1 is the top score with the lowest corresponding interest rate. G5 is at the other end, with the highest interest rate applied to loans.
Investors will have the chance to review your loan and decide whether to proceed. If approved, your money is available within a few days. This part of the process is totally anonymous, so you don’t need to worry about prejudice or someone you know finding out about your application.
Sounds pretty perfect right? No banks, the money is available within a few days, and your request remains anonymous. But you need a minimum credit score of 600 before they will consider you for a loan. That may not be doable for some borrowers.
Alternative Online Installment Loans
Fear not if you don’t qualify for the Lending Club. There are many online installment loan providers catering to those with low to no credit history.
Money Mutual has made a name for themselves as the lender to those looking for bad credit personal loans guaranteed approval. The only requirements are that you make at least $800 per month and have a checking account. If you have that, you can have your loan deposited into your account within 24 hours.
That’s what makes this the perfect option when you need money now. Kind of like peer-to-peer lending, Money Mutual doesn’t offer loans, it connects borrowers to potential lenders. After reviewing your application, whichever lender suits your needs best will offer you a loan.
The downside of Money Mutual is that they only offer short term loans of up to $2,500. So if you need more than that, they can provide some, but not all your loan needs.
More Money, Worse Credit
So what are the best installment loans if you need more than a couple thousand but still don’t have the credit score some lenders require? Badcreditloans.com has built their business around borrowers with bad credit. Like Money Mutual, they pair you up with the most appropriate lender for your situation.
Doubling the limit of Money Mutual, badcreditloans.com offers up to twice as much. You can have $5,000 in your account ready to spend within a day.
They know many of their borrowers are in bad financial situations. This is why they offer resources and articles on how to make your loan last longer and how to improve your credit score.
Rebuilding Your Credit
Now that you have a few options for getting emergency cash, what about the future? How can you build your credit score so you can get bigger loans like a mortgage? There are installment loans made specifically for those building their credit. That’s why they’re called credit builder loans.
Credit builder loans are secured installment loans, but they act as their own collateral since you won’t have access to the money until after you’ve paid the loan back. Let’s say you take out $1000 credit builder loan from a credit union. Many credit unions will put the money into a Certificate of Deposit (CD) that builds interests while the borrower makes their payments.
When you finish paying off the loan, the full loan amount plus any interest it collected are all yours. Keep in mind that most lenders will charge an application fee as well as around 12% interest through the duration of the loan.
So what’s the point of taking out a loan you can’t spend but still have to pay interest on? When you make consistent payments back to your lender, they report it to credit agencies so your credit history makes a fast climb to a higher score.
Lenders may offer credit insurance to ensure they get their money back. The big difference between regular insurance you have for things like medical care is that credit insurance doesn’t pay you anything. Instead, it makes sure that your loan gets paid back in a situation where you can’t.
The five types of credit insurance include:
- Life–repays your lender if you die.
- Involuntary unemployment–covers several months of payments if you lose your job.
- Disability–covers several months of payments if you become disabled
- Personal property–pays back the lender if the item you bought is lost or stolen.
- Family leave/leave of absence–covers several months of payments if you have to leave work to care for a family member.
Because the commission the insurer pays the lender determines the interest, credit insurance is more expensive than regular insurance. Keep in mind that credit insurance is optional, because it may make the payments on your loan unaffordable.
“Is an Installment Loan Right for Me?”
When Latoya Scott needs cash, installment loans are her go to. On top of her regular debt payments, paying back her installment loans on time improved her credit fast. Latoya and her husband own a house just two years after her bankruptcy.
“It amazes me that this narrative that bankruptcy means you’re financially ruined forever is still out there,” states Latoya on her blog, “If you’re patient and willing to learn proper money management habits and rebuild your credit, it’s certainly possible.”
Latoya didn’t use magic to improve her financial standing. She took out manageable loans and repaid them in a timely manner. Installment loans can help you in the same way. Use them when you need fast cash instead of a payday. Or use them to build your credit without letting your expenses get out of control.
Not Just for Bad Credit Scores
Remember that installment loans aren’t just for borrowers with low credit scores. The reason for this reputation is that installment loans have long been marketed as a better option to payday loans. But you can still use installment loans to your benefit once your credit score is in a healthy range.
Bad or no credit is a temporary problem. Online installment loans are an easy way to continue to build your credit while getting the money you need to pay all your bills. For more information on what installment loan provider is best for you, read this article now. Here are some other articles you might find helpful: