The Myth of the “Bad Credit Personal Loan”

One of the great ironies of personal finance has always been that the people who need money the most are the ones who can’t get a loan and the people who least need the money are the ones who can obtain credit most easily. Nowhere is this more evident than in the world of personal lending. Getting an unsecured or personal loan with bad credit has always been somewhat challenging but in recent years it has become virtually impossible. The subprime lending crisis and subsequent credit crunch have caused all banks to significantly tighten their lending standards. The first customers to get squeezed out of the equation are those with credit problems. The unfortunate reality in 2009 is that if you have bad credit, you will not be able to get an unsecured loan from a traditional bank.

Do a search on the web for “bad credit personal loans” and you will see hundreds of listings for websites promising to deliver the elusive cash without collateral that you so desperately need. Look closely and you will find that every single one of these offers will be for a payday loan. A payday loan is a completely different product than a traditional unsecured installment loan (often called a signature loan). Payday lenders do not evaluate your credit when making the decision whether or not to grant you a loan. Instead they simply debit your checking account automatically on your next payday. Of course the lender’s significant fees are debited as well. This product can make sense for a short term emergency situation that requires cash but it does not accomplish the same thing as a personal loan which could allow you to repay over a much longer period, usually between 12 and 48 months. Personal loans also carry lower interest rates. Typically, personal loans carry annual percentage rates (“APR’s”) that are equal to or better than most credit cards. If you look at the average fees on a payday loan and converted them into the equivalent APR’s you would be looking at mind-blowing rates of up to 350%. So, while a payday loan can be a good product for short term, emergency situations – it cannot replace the value of a personal loan.

So if you’ve got bad credit, need cash and cannot use payday loans to meet your needs, what are you to do? Assuming that a refinance with cash out or a home equity loan is not a viable option you are left looking for an unsecured loan. One interesting option is a relatively new phenomenon called social lending or peer to peer lending. These are professionally run networks that bring together individuals who wish to lend money and individuals who wish to borrow money. Some peer to peer lenders cater to people with bad credit (of course the interest rate will be higher). Social lending is one of the most exciting developments in the world of bad credit lending to come around in a long time.

More importantly, the most effective thing that you can do to help your situation is not a loan at all: improve your credit score. Improving your credit score will help make obtaining loans, both secured and unsecured, much easier and cheaper. How do you improve your credit score? The first thing you need to do is understand what is on your credit report. You can get a free credit report each year and it easy to do – just go to www.annualcreditreport.com and get it. Once you know what’s on your credit report you can get to work on cleaning it up. If you find a mistake or discrepancy, make sure to contact the credit reporting agency and the lender in writing so that the mistake can be fixed, and your credit score can be improved.

Another way to improve your credit score quickly is to obtain a secured credit card. A secured credit card is a credit card which is secured by a cash deposit. Most cards can be converted to unsecured accounts or partially unsecured accounts after a period of regular and timely payments. Regardless of the account type, your regular and timely credit card payments will improve your score dramatically.

If your credit problems seem too big to tackle on your own you can enlist the help of a credit repair service. Just do your research and check with the BBB and ripoffreport.com to make sure that you pick a reputable credit repair company. This type of service can help you improve your credit score and will allow you to quit searching for that impossible to get bad credit personal loan. You will find that with a good credit score you can obtain a personal loan fairly easily, even in the midst of the current credit meltdown.