The topic of personal loans has been getting a lot of attention lately amidst the government shutdown which is driving many federal employees towards borrowing. Even prior to recent events, personal loans have been considered the fastest growing method of borrowing, having gone up 11% in popularity from 2017 to 2018.
That growth isn’t particularity surprising to those who have taken out personal loans in the past.
While many financial gurus recommend against them, the fact is that personal loans provide a valuable service to people who encounter unexpected expenses and are living paycheck to paycheck.
But what if you’re looking for an unsecured loan (no collateral) and don’t have good credit? What are your borrowing options then?
Below, our team shares with you everything you need to know about unsecured loans for people with bad credit so you understand what steps to take next.
What is an Unsecured Loan?
Many borrowers looking for unsecured loans for people with bad credit are hazy on what an unsecured loan entails. To clear the air, an unsecured loan is money that gets borrowed from a lender on good faith.
Good faith means that lenders do not ask to put liens on property (cars, stocks, etc.) prior to giving money to borrowers. Given that lenders take the majority of the risk with unsecured loans, you may be wondering how they determine which borrowers to trust.
This selection process is largely determined by a borrower’s credit score.
What Kind of Credit Do You need to be Considered “Trustworthy”?
Your credit score will play a large role in a lender’s decision of whether or not to offer you an unsecured loan.
If you’re reading this article, chances are you’re convinced that you don’t have the kind of credit a typical lender would deem acceptable. But where exactly does the threshold of acceptability start and stop?
Unfortunately, there’s no hard answer to that question.
Each lender approves unsecured loans for people with bad credit or denies them based on a unique set of standards. Therein lies the value of researching a variety of lenders to see which ones are most likely to fulfill your loan request.
You can learn more about good and bad credit here.
Why are Unsecured Loans Preferable to Secured Loans?
Borrowers prefer unsecured loans for people with bad credit to secured loans because unsecured loans put the risk on the lender while secured loans put risk on the borrower.
When borrowers take out secured loans, they’ll need to provide a piece of property that gets valued in excess of the amount they want to borrow. For example, if you were borrowing $1000.00, you might need to provide your lender with the deed to your car worth $1400.00
If you were to not pay back your loan, lenders would be able to recoup their investment by selling your vehicle.
Because of the insurance lenders get through secured loans, secured loans are much easier to qualify for with bad credit than unsecured loans.
The Downside of Seeking Unsecured Loans with Bad Credit
Seeking unsecured loans for people with bad credit can be an arduous process. First, there’s the issue of finding a lender to work with.
Most lenders won’t give unsecured loans to sub-prime (bad credit) borrowers. Finding one that will could end up being a “needle in a haystack” search. During your search, you’ll likely fill out a lot of applications and get a lot of rejections.
Each rejection will ding your credit score which will make it progressively harder to get approved.
Even if you are able to find a lender that approves unsecured loans for people with bad credit, you may find that dealing with them turns out to be problematic.
Many lenders that target bad credit borrowers with unsecured loans will charge exorbitant interest rates that may even be considered illegal shark loans. They’ll also charge a plethora of hidden fees.
Bottom line… You’ll want to be very careful when seeking unsecured loans if you have poor credit.
Unsecured loans are built for people whose credit scores don’t require security. If anybody is telling you otherwise, you’ll want to go through their deal terms with a fine tooth comb.
How to Get an Unsecured Loan With Bad Credit
Now that you understand some of the definitions and risks that are associated with unsecured loans for people with bad credit, here are some tips on how you might acquire one.
Find Lenders That Advertise Unsecured Loans for People With Bad Credit
It’s not hard to find an online lender that advertises unsecured loans for people with bad credit. A simple Google search will likely turn up hundreds of them.
If you’re looking for an unsecured loan and know that you’ll need a special lender to help due to your credit score, narrow your search by only engaging with lenders that advertise bad credit products.
You can use the tools at Bonsai Finance to help you find qualified lenders who may be willing to work with your credit situation.
Talk to a Local Banking Institution You Have a Relationship With
Most banks and credit unions won’t entertain unsecured loans for people with bad credit. If you have a long-standing relationship with an institution though, you may get the benefit of the doubt.
Speak to your local bank or credit union and let them know the situation you’re in. Borrowers are likely to find more success with credit unions given that their lending terms are generally flexible. You never know how they may be able to help.
Get a Co-Signer
Many people with bad credit that are looking for unsecured loans turn to co-signers to get their application approved. A co-signer is a person you know with good credit that signs your loan alongside you and consents to take over your debt if you should stop making payments.
Getting a co-signer can be hard since they’re doing you a big favor in putting themselves on the line for your loan. If you can find one though, your odds of getting approved go up substantially.
Work on Improving Your Credit
At the end of the day, the most holistic way to get an unsecured loan is to improve your credit.
If you need money now, this may not be a helpful suggestion. If you can afford to take some time and improve your financial situation though, credit building can afford you a variety of benefits that could save you thousands over the course of your life.
What’s Your Best Option?
It’s hard to prescribe a specific path forward since we don’t know your financial situation. Talking in broad strokes though, if you have the collateral required, many financial advisors would recommend looking into a secured loan to enjoy better terms.
Managing a secured loan successfully may also boost your credit score which can then open you up to better borrowing options in the future.
Secured loans can get obtained through car title lenders, payday loan lenders, and even through pawnshops.
As always, do your diligence when borrowing from a lender to ensure that their terms are in line with what you can manage. Also, never put something that you can’t afford to lose down as collateral if you’re unsure that you’ll be able to meet your payment obligations.
The last thing you want to do is borrow money to get out of a financial hole only to find yourself in a deeper one soon after.
Wrapping Up Securing Unsecured Loans for People with Bad Credit
Borrowers looking to get unsecured loans for people with bad credit should understand their pros and cons prior to filling out applications.
Sure, unsecured loans reduce borrower’s risk as far as not needing to put down collateral. The risk, however, is still there in the way of high-interest rates, fees, and a higher probability of defaulting on payments.
Think carefully before taking out loans to make sure you’re taking out the best product for your financial situation. Also, be sure to validate the credibility of the lender you’re borrowing from prior to signing any paperwork.
To compare and contrast loan products quickly and easily online, consider leveraging our loan finding tools. With the click of a button, they’ll present you with a number of viable borrowing options that you can explore further.
Want more information on loans and tips on how to improve your financial situation? If so dive deeper into our Learning Center.