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Unsecured Loans for Bad Credit Borrowers

April 6th, 2010

unsecured-loan-bad-credit.jpgBeing considered “sub-prime credit material” is not easy. While mortgages, car loans, and equity lines of credit are within some reach of a person with bad credit, finding an unsecured loan may turn into a nightmare. Desperately trying to obtain some sort of loan, people further worsen their credit by applying to dozens of places, initiating multiple credit inquiries from potential lenders on their credit report. There are options available, though, such as payday loans, social lending loans, credit cards for people with poor credit, and even traditional personal loans.

Payday Loans

Payday loans are short-term loans, usually issued by check cashing places and online lenders, with maximum amounts of $2,500 and terms of up to 30 days. Commonly, such loans are only issued for one week with a renewal option, and the maximum amount rarely crosses $500. Widely criticized by consumer advocacy groups, such lenders offer quick processing times, usually within 1 day, and high annualized interest rates, sometimes crossing the 1000% APR mark. These loans should be used only when cash is needed urgently and there is no other place to get it.

Social Lending

A revolutionary concept, widely introduced only several years ago, social lending is an alternative way of obtaining financing. Loans are underwritten and issued by peer lenders through so-called lending platforms. While credit scores and payment history are carefully reviewed when underwriting such loans, borrower’s life circumstances are also taken into consideration. While such loans may not boast the best interest rates, they are perfect for small borrowing needs of up to $5,000. Such loans also feature low monthly payments, since they are usually long-term, ranging from 36 to 60 months.

Credit Cards for Poor Credit

A credit card is another way to get unsecured funding. Quite a few banks offer credit cards to people with limited or poor credit history. Some offer quick processing (within 3 business days) and credit limits as high as $1,000. One should be aware of the costs, though, since such cards are usually a subject to a number of fees: issuance fee, processing fee, annual fee, monthly maintenance fee, and so forth. Also, APR on these cards is quite high, right on the borderline of maximum allowed limits by the U.S. government.

Traditional Loans

Surprisingly, some banks would issue personal unsecured loans for people with bad credit. Typically it is a lengthy process, and in most cases requires a co-signer. A borrower should be prepared to gather and submit a long trail of paperwork: pay stubs, employment verification letters, a letter from the landlord, bank references, personal references, and so forth. In the case of success, the borrower is usually rewarded with a lower interest rate compared to other available options, as well as a higher loan amount.

Friends and Relatives

When it comes to emergency, getting financial help from friends and family may sound like the best idea. While it is not a proper solution for funding a car purchase or a home renovation, in certain situations, such as illness or unemployment, this may be the only available option.

Alternative Options

Many people may be surprised where the needed money may come from. Besides for the loan options mentioned above, it may be noteworthy to look in some other places. A 401k plan or a whole life insurance policy, for example, may be an excellent source of borrowing funds. Also, talking to your boss at work may be a solution, since some employers may offer cash advances or short-term loans for their employees.

This article was supplied by Melissa Spicer from Constant Content.

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