Credit rating is important because it determines the availability of additional credit. People in debt and those with no credit or poor credit scores often have difficulty obtaining personal loans, auto loans, and mortgages. It is not impossible to get a loan if you have bad credit, it just requires some creativity. Knowing where to look for this financing streamlines the process, putting money in your pocket when you need it most.
Credit unions take a more personalized approach to lending than do banks or building societies. A credit union lending officer will review your entire financial situation, not just your credit score and loan application. Therefore, you may receive approval for a credit union loan when banks and building societies have provided rejections. Peer-to-peer lending is another possibility because individuals with money to lend view you as a person, not just a credit score.
Friends and family members with extra cash may be willing to lend it. If your credit score is very low, this may be your only option. Treat this like any lending arrangement, putting terms in writing and factoring interest into the repayment amount. If a friend or family member is not willing to lend the money, he or she might agree to serve as a cosigner for a loan from a bank, credit union, or building society.
A cosigner guarantees loan repayment, taking responsibility if the primary borrower defaults. Collateral serves a similar purpose and can increase the chance of qualifying for a loan. Collateral is something of value that is pledged to guarantee a loan. For example, some people use equity in the home as collateral for a loan. If they default on the loan, the lender can use this equity to recoup the money it provided.
Pawnshops offer loans to people in exchange for valuable assets like jewelry, artwork, furs, and even cars. The borrower submits the item to the pawnbroker, receiving a loan of a certain amount in exchange. This loan and an interest charge must be repaid within a predetermined period or the pawnbroker assumes ownership of the asset, which it then sells to get back its investment.
Some lenders cater to people with poor credit, offering loans for automobiles, personal reasons, and even to finance a home purchase. However, many of these lenders are not scrupulous, charging very high interest rates and other fees. Some of these loans are very short-term in nature and if the borrower does not repay them within the initial term, charges accrue, possibly putting the individual into debt. These types of loans should only be used in emergencies and only if the borrower is able to repay them during the initial period.
If your credit score is low, explore these lending alternatives and determine if any are appropriate for you. Each has different risks and benefits so be aware of these before entering an agreement. Repay all loans on time because this can increase the credit score. Once the score improves, it should be easier to qualify for a traditional loan.