There are plenty of misconceptions about taking out a loan with a poor credit score that keep credit utilization low. Personal loans are useful financial tools that can help people make smart investments and set their finances straight. We’ll debunk some of the common myths about taking out a personal loan with bad credit.
Personal loans aren’t accessible to people with bad credit
People with poor credit scores can, in fact, take out personal loans. Depending on the type of personal loan you’re seeking, and the financial institution you’re working with, you can often find loans that accommodate poor credit scores.
Some lenders offer loans that use collateral, like share secured loans, to reduce the risk of offering a loan. You might also be able to commandeer the help of a co-signer with a good credit score who can repay the loan amount if you default on your debt.
If you have a poor credit score, try asking for an in-person meeting with a loan official before you apply for a personal loan. This way, you can explain why you will be able to repay your personal loan by showing proof of your assets and income.
Lenders require collateral from bad credit borrowers
Staking your assets on the loan can be a good way for borrowers with bad credit to secure a loan at reasonable interest rates, but it’s not necessary to have collateral to take out a loan.
Look for an unsecured loan, like a signature loan, if you’d like to take out a loan without collateral. It’s risky for financial institutions to offer unsecured loans to people with poor credit, so you might have to pay higher interest rates or use your employment history to convince the lender of your credit-worthiness.
People with existing debt can’t take out new personal loans
This myth is patently untrue. Many people with existing home or car loans will take out a personal loan to make home improvements or finance an unexpected expense.
In fact, there are even some personal loans specifically designed for people with multiple outstanding debts. A debt consolidation loan can help you bundle your debts so you can make one monthly payment with a reasonable, fixed rate.
You need to go to a bank to take out a personal loan
Banks are popular lenders, but they aren’t the only place to get a personal loan. Credit unions are equally secure lenders that are federally regulated and able to offer reasonable interest on their loans.
Credit unions are not-for-profit institutions, and they are often known for lending to people in financial need. If you have a poor credit score, you may qualify for a personal loan from a credit union, even if you’ve been denied by a bank.
Lump-sum loans must be repaid all at once
If you’re considering taking out a personal loan, it may be because you don’t have the funds to cover a major expense that’s just popped up. You wouldn’t want to have to repay the loan in a lump-sum either.
Luckily, most lump-sum loans, including signature loans and life loans, are meant to be repaid, with added interest, in monthly installments. These installment loans make it easier to finance large expenses by increasing the time you have to pay it, but they’ll also increase the total cost you pay by charging a fee in the form of interest.
Personal loans negatively affect your credit
If you already have a low credit score, you might be wary about taking out a loan that will further undermine your credit history. It’s true that mismanaging a personal loan can destroy your credit score, but if you properly manage a loan, you can actually prove your credit-worthiness to the credit bureaus that create your credit score.
Credit scoring models weigh your history of repaying your loans heavily, so taking out a loan that you can afford to repay each month will improve your credit score.
Credit cards and share secured loans are personal loans that can easily be leveraged to improve your credit score. If you make on-time payments and stay out of credit card debt, you build up a favorable record of repaying your debts. As a bonus, you only have to repay the loan amount, without an added interest rate, on credit cards, so long as you make timely payments.
Personal loans keep you in debt
Personal loans themselves will not keep you in debt, and taking out a loan can be a smart financial decision that helps you put your finances in order.
You might use a debt consolidation loan to lower your monthly interest payments and make it easier to stay on top of your bills, or you might take out a signature loan to fund unexpected expenses that you’ll repay over time.
You can even use personal loans to invest in your future earning power. Taking out a student loan can help you fund your education, which can help you achieve long-term financial stability.
Beware of lenders who market specifically to borrowers with poor credit. Loan sharks and payday lenders offer loans at exorbitantly high interest rates and make it hard for people to get out of debt.
Luckily, there are lenders that care about their customers finding financial security. T&I Credit Union offers financial counseling services and money management tips to help our lenders get out of unhealthy debt and improve their credit scores.
The truth about bad credit and personal loans
Personal loans are not only accessible to people with bad credit, but they can be smart financial decisions that lead you toward long-term financial security.
To learn more about our personal loans and how they can improve your financial situation, contact T&I Credit Union.