Alternatives to bad credit loans
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When you need cash in a hurry, it can be tempting to consider bad credit loans — personal loans available to people with poor or little credit history. These loans are convenient because they are accessible to most people and don’t require a credit check. However, there is a trade-off to these loans: high interest rates that will likely lead to more expenses for you in the long term.
Before exposing yourself to bad credit loan risks, it’s worth exploring your alternatives. If possible, it’s best to exhaust these options before pursuing a high-interest loan. They come with lower interest rates, less strict repayment plans and less risk of long-term financial challenges.
Raise your credit score before applying
Start by improving your credit score to get better terms on loans, including APRs and longer repayment periods. You may get more flexibility when it comes to things like your monthly payment date.
This option can be easier said than done, and it does require some time for your actions to reflect in your credit score. But if you have the time and ability, these are the best ways to raise your credit score quickly:
- Get a secured credit card: If you have some cash available, consider using it to get a secured credit card. They operate like traditional cards and can be used online and at most retail locations. When you make payments on time, they are reported to the credit bureaus and improve your credit score. But if you don’t make payments, the cardholder will close the card and use your security deposit to pay off the balance.
- Pay credit balances: This might seem counterintuitive for someone who needs immediate cash, but paying down your balances to lower your debt utilization has a high impact on your credit score. Pay off your balances strategically by getting your debt utilization below 30% to have the best chance at a higher credit score.
- Request higher credit limits: Another way to improve your debt utilization is by upping your available limit. Contact your credit card issuer and ask if they will raise your credit limit — though make sure you ask if they will require a hard inquiry, as that will temporarily lower your score.
- Dispute credit history errors: It’s quite common for a credit report to contain incorrect information that hurts your score. Request a free credit report, look for errors and file disputes with the credit bureaus if needed.
- Get credit for monthly expenses: Some services like Experian Boost consider alternative credit data, or payments made to service providers when calculating your credit score. That includes rent, utilities, and cable bills. Making consistent payments on time can help boost your score with these services.
Make extra income
The best way to avoid relying on bad credit loans is by generating extra income, if possible. In most cases, this requires both time and effort. However, there are opportunities available through the gig economy that could allow you to generate additional income.
If you have a car, consider driving for a company like Uber or Lyft. Or if you are crafty, consider launching an Etsy store. If you have property, you can try to rent it to turn it into additional income. Consider making donations of blood or plasma. Try selling products, furniture, appliances or clothes you no longer need.
All of these solutions will require time to start producing returns, so know that you may have to wait to see results.
Borrow from friends or family
The prospect of asking loved ones for money can be scary, but it can also be the best option for you financially. There is pressure to repay the loan based on maintaining your relationship with the person or persons who lend to you, but the terms are likely to be way more friendly than a bad credit loan.
Know that you aren’t alone in this, too — more than 10% of American adults borrow from loved ones. Financial struggles affect many people, and your friends and family will likely understand your challenges the most. Even if they can’t help directly, they may be able to support you in another way once they understand your struggle.
Find a lender that does not consider credit as the primary factor
Some financial institutions are willing to look past credit scores and consider other factors when making decisions on who to lend money to. Online lenders will often look at your bank statements and pay stubs to confirm that you have income available and would be able to pay off the loan, even if your credit score is less than perfect.
Make sure you review the loan terms, as they may have steep interest rates, fees or restrictions. Still, these loans are often much better than traditional bad credit loan options.
Credit unions may offer more friendly terms than a traditional lender and sometimes consider factors outside credit score and history when considering a borrower. Credit union loans are typically for smaller amounts but are worth considering to cover some of your expenses.
Split up big purchases
You can also avoid taking on more debt by splitting up big purchases. It can be a viable option if the retailer or service provider offers payment plans to help prevent you from emptying out your savings or going into debt to make the purchase.
This approach also works if you owe a large amount of money to a landlord or service provider as some offer payment arrangements to help you get back on track. Or if you need to cover an unexpected expense, like a medical bill, the provider may be willing to work with you after rendering the service.
Get a credit card
While it’s not an ideal solution, you might be able to pay some of your imminent bills by securing a credit card. A credit card will carry an interest rate higher than most personal loans. However, the rates can still be significantly better than those made available by lenders that offer bad credit loan options.
Use a home equity loan or HELOC
If you have a home or property that you have made payments on, you can take out a loan or a line of credit that allows you to turn your equity into cash. In the case of a home equity loan and a home equity line of credit (HELOC), both act as a second mortgage and use your home as collateral.
A home equity loan will be paid out in a lump sum, whereas HELOC operates more like a credit card, giving you money on an as-needed basis. You will have to pay closing costs from refinancing, but it is an option to get access to money faster.
Bad credit loans can offer short-term financial support but are one of the easiest ways to get trapped in a cycle of debt that can become increasingly difficult to break. If you can avoid this option, you should do so.
There are ways to secure money that is not reliant on your credit score and likely will not carry the same onerous terms as the average bad credit loan. Make sure you explore your options before seeking a bad credit loan.