Don't swear off loans just yet -- paying cash for everything does next to nothing to help re-establish your credit. The loans you'll qualify for after having bad credit may not have the best terms but they will help to reestablish your credit. This article will show you how to start rebuilding your financial status.
It's important to know how bad your credit really is. If you are unsure, contact one of the three major credit unions (Equifax, Experian and TransUnion) to find your exact score. If it's below 620 (on the scale of 300 to 800) you have bad credit. You are eligible for one free credit report per year at www.annualcreditreport.com.
Undeniably, past credit mistakes will limit your ability to obtain loans. The good news is there are loans for people with bad credit and after researching, you will find that you can secure certain loans in a relatively easy fashion. These smaller loans -- when used properly -- can help you establish good credit again, thereby reinstating your eligibility for the bigger and better loans.
- Time is money: The surest way to get qualified for a loan after credit trouble is to pay your bills on time. You need to prove to lenders that you have learned a costly lesson and now value the importance of sustaining good credit. Also, maintaining employment at one place for a minimum of six months will gain the trust of lenders again.
Setting up a sound budget and payment plan is fairly easy. No matter whether you prefer paper and pencil or a keyboard and mouse, there are numerous templates available to help you keep track of income and debt. Budget templates for your computer can be found on numerous software programs -- Quicken, Microsoft Money, and Microsoft Works are a few that come to mind.
If the idea of setting up a detailed budget sounds overwhelming, there is a simpler route. Set up two columns -- one listing your bills each month and the other listing the income you earn -- and then compare (and adjust, if necessary) the two opposing columns. Remember that setting up a budget doesn't have to be complex in order to work; the most important part is how well you stick to it.
- Car loan: With bad credit, you'll most likely be looking at a dealer-financed car loan. There are a couple of downsides to this kind of loan. First, you'll be paying a dreadfully high interest rate. Second, the threat of repossession is very real. With some dealers, being late just one day with a payment means repossession of your car. You need to read the fine print in the paperwork to be sure you agree with all bad credit auto loan stipulations the dealer has written into the contract.
Just because you are searching for a bad credit car loan, know that you don't have to take the first offer given by a dealership. Barter for a lower interest rate if the original offer is too high. Interest rates on dealer-financed car loans vary. Dealers make a profit off of your interest rate, and some are greedier than others. If you think you can obtain a better rate, go find it. You just never know when the next dealer down the block will find your credit rating desirable enough to offer a lower interest rate.
- Passbook loan: This kind of bad credit loan works like a secured credit card. Both require that you already have a savings account containing the amount of your loan in it. This protects the lender in case you default on the loan, especially since you are attempting to get a loan with bad credit. You open up a savings account at a bank, establish a record of putting money into your account, and then apply for a loan with your bank.
A passbook loan is great for re-establishing credit. It doesn't show up as a secured loan on your credit report. To anyone reading your report, it just looks like a regular loan from a reputable financial institution, not a bad credit personal loan. As a bonus, your savings account will be earning interest while you use the loan money.
- Co-signed loan: In this case, another person guarantees your loan by agreeing to pay the loan should you default. If you pay the loan off on time, you and your credit score benefit. If you fall behind or default on the loan, the co-signer is responsible for payment and his credit will be damaged. The co-signer must qualify for the loan as if it was in his name. This can work if a family member or friend has the means to help you out. In the event that you cannot make the payments, your relationship with the co-signer may be in the same shape as your credit rating, making this a tricky option. Depending on how bad your credit rating is, you still might not qualify for a loan even if your co-signer does.
- Mortgage loan: Obtaining a mortgage loan usually means needing a couple of years with good credit. A mortgage lender will look at how well you've been paying your bills. Again, it's a matter of trust. You become more desirable as a loan candidate when a lender sees you've been paying all your bills on time for several months. This will show the lender you have become a good credit risk despite the fact you are applying for a bad credit mortgage loan. If you find the right house at the right price and want to try to obtain a mortgage with bad credit, one helpful resource is www.mortgagecreditproblems.com.
If you want to keep monthly payments low and can't afford to put much money down, then either a Federal Housing Authority (FHA) loan or a Veteran's Administration (VA) loan may be right for you. Both require only 3 percent down and will work with you to find a reasonable monthly payment.
If you can afford a large down payment of at least 20 percent, then the lender may do a no-documentation loan. This kind of loan means you don't need good credit because the bank isn't going to factor in your credit history. Regardless of the type of bad credit home loan you obtain, make sure it works for you.
Having bad credit isn't the end of your financial future. With diligence and wisdom, you can bounce back from credit troubles. If your debt feels like an addiction that is out control and is hurting your family, then Debtors Anonymous (DA) can help. It is a free support group that models itself after Alcoholics Anonymous; DA even has its own "12 Steps." The only requirement needed to join is a desire to manage your debt. There are over 500 Debtors Anonymous meetings across the United States and in 13 other countries across the world.