Did you know that the average credit score in the US is right around 700? This is considered the “good or fair” category when it comes to rating your credit. If your score is lower than this, though, you are not alone.
Although you may not be eligible for all loan types or the lowest interest rates when you have a low credit score, getting a loan isn’t impossible. Keep reading for some of the different loan types that you might qualify for even with a less-than-stellar credit score.
What Is Your Credit Score?
First things first, you need to check your credit score. Your credit score is basically a number that represents your credit history. Credit scores are important because they will determine the loan types you can get, the terms and interest rates, as well as your insurance premiums and even employment opportunities.
Your credit score considers your payment history, how much you owe and how much credit you have available, the length of your credit history, the types of credit used, and whether you have any new or recent credit inquiries or accounts.
Borrowers with lower credit scores are considered riskier for a lender, so they tend to charge higher interest rates and have more strict loan terms and requirements.
Loan Types for Bad Credit
There are many different loan types for credit scores in every category. If your score is on the low end, you still have options.
Open-Ended and Closed-Ended Loans
Open-ended loans are basically lines of credit. They have a credit limit, but you can continue borrowing until you hit that limit.
Every time you buy something, your available credit decreases (impacting your credit score). There are credit cards out there for individuals with low credit scores, but the interest rates are often much higher.
Closed-ended loans are one-time loans for a set amount. For example, a car loan, mortgage loan, or personal loan. You get a loan for a certain amount and make a fixed payment each month until you pay it back.
Again, like open-ended loans, you can find some even with bad credit, but the interest rates are typically higher and the terms are not as good.
Often viewed as debt consolidation loans, personal loans can help you pay off higher interest loans or credit cards. They are closed-ended in most cases, meaning you apply for an amount, receive what you are approved for, and then use the money to pay off your debts.
These loans could either be fixed-rate or variable. If possible, avoid variable-interest loans. These loans have an interest rate that changes over time and could make your payments much higher than you expect. A fixed-rate loan keeps your interest rate and payment the same for the life of the loan.
Just like the other loans, personal loans will be more difficult to get and will have higher interest rates for people with bad credit.
The Bottom Line
While the loan types available to people with low credit scores are limited, with some research and time, you can find loans with decent terms. Avoid payday loans and variable-interest rate loans at all costs. These loans often prey upon people with bad credit that are desperate.
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