February 4, 2012

With the recent global recession, more and more people have seen their credit scores drop as lenders restrict credit to the highest credit scores. For millions of people, this can be a big blow, as easy credit was part of the plan for the future. Whether it was financing a new home, a new car, or paying for college, credit was an important part of how people purchased goods and services. Finding loans for people with bad credit was a challenge that many people were stuck with.

Depending on the lender, a bad credit score can be anything below 640 to 600. Prior to the recession, bad credit scores were considered anything below 580. This restriction of credit to borrowers has resulted in fewer loans for people with bad credit. However, there are options available to bad credit borrowers.

Bad Credit Loans
There are lenders who specialize in lending money to individuals with bad credit scores. These loans for people with bad credit are usually from institutions other than traditional banks. For the risk a lender takes with an applicant with low credit ratings, the interest rates charged are usually higher than from a bank. A bad credit score shows an increased risk of default, and companies protect themselves from this risk with higher interest rates.

Provided a customer can pay the monthly payments on time, even a bad credit loan will increase ones credit score. It will show other lenders that one can manage and repay their loans in a timely fashion. There are many of these companies who specialize in loans for cars, appliances, or personal needs.

To obtain a bad credit loan, an applicant needs to submit to a credit score check, show proof of employment, and in some case, provide collateral to the lender. For some lenders, this could be a car, a paycheck, or just a signature. Once the application is submitted, the loan is processed, and if approved, the money is provided for the new purchase or as cash in hand.

Traditional Lenders
For traditional lenders, loans for people with bad credit come with increased risk of default. Rather than lend with higher rates, like non-traditional lenders, banks will deny the application. To have the best chance of obtaining a loan with a traditional bank, one has to fulfill extra steps and obligations to prove their credit worthiness.

For a bank to provide loans for people with bad credit, the banks want assurances that the loan will be repaid. The banks will require an applicant to show their current financial situation, meaning a full list of expenditures and income. They will require any negative marks on a credit report to be in the past, and ones that are inaccurate to be challenged by the applicant. The older a ding on a credit score, the less impact it will have in the lending process when viewed by humans.

Additionally, any outstanding lines of credit must be paid regularly without any defaults for at least a year or two, depending on the bank. Any credit cards must be paid regularly and the balances must be less than 25 percent of the line of credit. An applicant must prove they are responsible, and the credit score is from past mistakes, not recent history.

If an applicant cannot show they have the income available to pay the loan back, and their credit balances are too high, the applicant will be denied. Banks will deny people who have too many home expenses as well, making loans for people with bad credit difficult to obtain without taking some extra steps.