1. Loans are only for people with good credit.While having good credit will result in better loan terms, there are plenty of lenders that exist with the purpose of loaning money to those with bad credit scores. Bad credit only means that it will be more difficult to get a loan, not that it will be impossible.
2. Bad credit loans are only for people with a history of defaulting.A popular myth is that only people who have failed to repay a loan have bad credit and this is completely false. When your credit score is calculated, a few things are taken into consideration:
Types of credit opened:
- Credit limit
- Credit balance
- Payment history
- Credit inquiries
- Collection information
3. You need collateral to get a loan with a bad credit score.Collateral is an asset that a borrower is required to put down, usually in the form of a house or car, in case they fail to repay the loan. Collateral provides the lender with security, as they know they will receive something if the loan isn’t repaid.
There are two kinds of loans: secured and unsecured. Secured loans require collateral; unsecured loans do not. If you have a bad credit score, it will be much easier to get a secured loan than an unsecured loan because a secured loan guarantees the lender some form of payment if the borrower cannot pay them back.
Simply because it’s easier to get a secured loan doesn’t mean that’s your only option though. As mentioned above, there are numerous lenders that give unsecured loans to borrowers with bad credit.
4. Taking out a loan with a bad credit score is not a good idea.Your credit score will fall initially when you take out a loan due to credit inquiries and a higher reported credit balance. However, this drop will not last if you make consistent payments. The only way to improve your credit score is by taking out more credit and successfully paying it back. It is never a bad idea to take out a loan if you are certain that you can pay it back.
5. Repayment terms on a bad credit loan will be impossible to pay back.Having a bad credit history leads to higher interest rates. For example, the average interest rate on an auto loan over $30,000 in the United States is 3.2%. The interest rate for someone with a bad credit history for that same loan can be as high as 17%. It is important to keep in mind that the 17% interest rate is basically a “worst case scenario.”
Lenders are in the business of lending money and gaining a profit in the form of interest payments. They understand that if they charge extreme interest rates to everyone with a bad credit history, no one will be able to pay the lenders back. Because of this, lenders will try to work out the deal that works best for both you and them.