Bad Credit History:

Like a modern day scarlet letter, very few lenders want to deal with a person with bad credit. In some cases, even existing lenders such as credit card companies may cut off or cancel existing accounts based on periodic reports finding credit problems. However, believe it or not, a loan with a bad credit history is still possible.

There are a couple of ways to go about getting approved, but they all generally fall into two categories: circumvent the traditional borrowing system, or improve your credit score. Fortunately for borrowers, the two are not exclusive. A person can work on both angles until his credit history has improved again, still being approved to borrow in the meantime.

What is Bad Credit, Technically?
Bad credit history is different from a bad credit score. Credit scores are established by taking out loans. As you borrow, financial institutions begin to score your borrowing performance by reporting your status to credit reporting agencies. Over time, your activities create a score. 800 and above is a wildly good score; lenders will practically throw money at people with such a high rating. Those at 640 or below will find it hard to borrow, and the lower the score the harder it gets to be approved for anything.

Bad credit history reflects on your actual borrowing performance. Having a bad history means that you have marks against you reported by lenders. These could be late payments, missed payments, defaulting on a loan, or worse, bankruptcy. It doesn’t take much to start a bad record; miss a payment or two and your history begins to reflect warning signals.

Since lenders need a gauge to measure people quickly rather than thoroughly review every application received, they use credit scores and credit history to weed out undesirables. Thus, borrowers scoring less than 640 frequently find their loan applications being denied outright.

Ok, My Score is Bad, How to Improve?
The only tried and true method of credit history and score improvement involves restoring lenders’ faith in you. This means paying off your existing debts and showing a pattern over time of regular, timely payments. Both practices improve your credit score and credit history as they eventually bump your bad data off the credit history report. However, this process takes time. You could pay off all your loans tomorrow but still show a bad or hurting credit score. Only a few years of consistent payments begins to bring a bad score up again. That said, for those needing a loan sooner, this process could take too long. In such instances, a borrower needs to consider the alternative: circumvention.

Getting Around the System
The initial idea of borrowing a loan involves going to a bank or a credit card company for financing. However, there are number of other outlets from which one can borrow funds. The first thing to remember though is that the loan approved will likely cost more than normal. This is because with a poor credit history a borrower represents more of a risk. To offset this possibility, lenders charge higher interest, costing the borrower more money overall. Second, some borrowers may want more security than just your promise. In such cases, you will need to provide some kind of security in case you default on the new loan. Understanding these possibilities, loans can still be had out there.

Credit Unions Want Business
Unlike big banks, credit unions tend to be limited to a specific group of people or a community for banking purposes. Many such institutions are formed by trade or employment groups such as government workers or construction workers. As long as you meet their member qualifications, such institutions can accept you as a credit union member. Because credit unions are more community-based, they are far more likely to examine your loan application with the human factor rather than a computerized formula. If you can be honest, explain your bad credit and how you’re improving it, and show you can pay your loan, credit unions tend to have a higher risk tolerance and will likely approve.

Peer-to-Peer Lending
Alternatively, you can avoid dealing with a banker altogether. With the Internet aggregating numerous individual investors, you can essentially take a loan from a peer-to-peer operation. You apply as normal with your credit history. The middleman peer lending operation represents your profile to member investors who then decide whether to provide funds for your loan. The riskier your loan, the higher the interest paid to the investors who can lend as little as $25 or as much as $1,000 per person. All the funds approved become added together for one loan. For the borrower, the loan comes with an interest charge and payment plan. For the investor, it’s a chance to play banker and make a gain. Within these systems those with questionable credit have a better chance of being approved a loan versus trying to get one from a big bank.

Friends or Family
Borrowing from relatives or close friends is possible with bad credit, if they agree, and many times they will lend funds to a relative or friend borrower for little or no interest. However, the obligation to pay the loan back timely is even more sensitive. Should a borrower default, that relative will be reminding the borrower of the fact at every family meeting until he passes away. If a friend is jilted, it can permanently damage a friendship that took years to form and bond. If a borrower isn’t sure he can pay the funds back, then friends and family should be avoided as a loan resource.

Collateral
Where an unsecured loan, just based on a borrower’s word, will likely get denied with bad credit, a loan based on collateral has far more likelihood of being approved. This is because the lender essentially can seize the agreed upon collateral to pay off the loan if necessary. Homes, cars, jewelry, and valuable property all make viable collateral for lenders, as long as they can liquidate the property to cash. Again, a borrower needs to be sure he can give up the collateral if things go wrong, but otherwise a secured loan will have a stronger chance of being approved despite bad credit history.

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