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The types of loan to opt for those with a bad credit

Life is uncertain, and emergencies can occur anytime. Today, people with low credit scores often need to procure personal loans to address their requirements. There are multiple loan types that people with bad credit can choose.

  1. Installment loans

Simply put, an installment loan is a term that comprises personal loans as well. It enables you to borrow a stipulated amount and pay it back over time. In the case of a credit card, the person accesses a revolving credit and pays interest depending on its amount. However, with an installment loan, you receive a bulk amount. After that, the person gets required to pay the fixed amount for specific months. 

2. HELOCs

The HELOC (Home Equity Line of Credit) is a good option for people with bad credit. It is a good option when your primary residence’s mortgage balance is lesser than the home cost. It is a revolving credit line, and there is a limit depending on the home equity. You will have to pay interest depending on what you buy on the credit line.

3. Peer-to-peer lending

It is yet another alternative to conventional lending and is the right choice for people with poor credit. The majority of peer-to-peer lending occurs with personal loan lenders. You can check out the Canada loans guide if you want.

In peer-to-peer lending, a person can apply for a loan, which will get financed by an individual investor. It is an excellent decision to avert the loans that appear to be “too good to be true.” When you have bad credit, such loans can get tempting, but you might have to pay increased interest rates, which will add to the financial burden.

A few considerations

It is necessary to assess the multiple risks and costs linked with a personal loan for poor credit. Two important things to keep in mind are:

  • A loan with cost more for a low credit score

If you have a less than perfect credit score for opting for a personal loan, it will cost you more. Usually, the online lenders and banks evaluate your credit score by tapping the providers like FICO. These providers use credit scoring models such as payment histories and loan balances to decide the creditworthiness. If your credit score is less, it is challenging for you to borrow money. Chances are you might have to pay an increased loan interest rate making up for the default risk.

  • Some predatory lenders target people with low credit scores

People with a bad credit score might get targeted by lenders through direct mail campaigns. These lenders might be marketing personal loan with a reduced interest rate. Such email campaigns usually advertise an introductory rate that will maximize once the initial time expires. Hence, if you can’t pay off the amount fast, these rates can increase as much as 20% to 30% more. And this interest rate is much more in comparison to the interest rate you can qualify for with a trustworthy lender.

People with a bad credit score must analyze the sources for a personal loan. The pointers mentioned above will help people to apply for a personal loan with ample know-how and preparation.