Question: How bad is a low credit score, if you need to borrow money? I don't want to get trapped in debt again, but I'd like to get a short-term unsecured loan, for three or four months. I know I can pay it back, but is it even possible with a low credit score? --H.B.
Answer: Unfortunately, your credit score affects a lot of your financial life. It's one of the major influences in how high an interest rate you'll be charged on loans, and therefore how expensive loans will be. It also can affect the cost of your auto insurance and potential employers can use it as part of assessing your suitability to be hired. If your credit score is low, under 600 or 620 for example, you can try to improve it by gradually paying off old debts or negotiating with creditors to settle debts by paying part of the balance due if they'll write off the rest, or by working out a payment plan. Bankruptcy is a last resort, and will wipe out most debts, though student loans and a few other things may be exceptions, but it will affect your credit score for years to come.
Even if you have poor credit, and even if you've turned your situation around and are now able to make payments on time, sometimes financial emergencies occur and you need a loan. Past problems can make it difficult to be approved at banks which expect borrows to have good credit.
The good news is that there are companies willing to assist those with poor credit scores, by offering unsecured loans, where your signature alone is your collateral. There's no need to put your home, car or other asset as a guarantee for the loan. As long as you're working a steady job or have another source of income such as disability payments, they will put more weight on your ability to repay than financial problems in the past.
However, they're taking more of a risk, so interest rates will be higher. Still, the APR or annual percentage rate is usually lower than a payday loan for a similar amount, and a short-term unsecured installment loan means you can take several months to pay the loan back in smaller payments, rather than having it become due all at once on your next payday.
Online loans, for those with bad credit, generally require that you have no other similar loans in default, and that you're over 18 and a legal resident. Your actual credit score is less important, so they may not even pull your report from the big three credit bureaus. Some online lenders ask you to sign and fax documents, while others let you complete the entire process completely online. You should have a bank account in good standing, so the lender can electronically transfer the proceeds from the loan into your account. Because the approval process is streamlined, it can occur quickly, the same day and generally within an hour. If you agree to accept the loan, the proceeds can show up in your account by the next business day, or within two business days at most, and then you can either withdraw the money or use it for writing checks of paying bills online.
If you have bad credit, avoid borrowing unless absolutely necessary or unless you've been able to pay off or negotiate a settlement on past debts. Otherwise, focus on getting caught up repaying old debts. But sometime emergencies arise and a short-term unsecured loan can help out and eliminate the need of having a new bill reported as past due or sent to collections.
The amount you can receive for a short-term installment loan depends mostly on your current income, which reflects your ability to repay. The minimum monthly income required is usually around $1,000, and loan amounts can range from $500 to $5,000, with higher amounts approved for those with higher income.
While interest rates can be expensive, lenders are required to advise you of the cost before you approve the loan. If you can repay the loan earlier than scheduled, you can generally save money, if the lender allows it.
My credit score was 580 and I thought I wouldn't be able to borrow anything, so I was surprised at being approved for a $750 loan online. I got stuck in the payday loan trap once, where you wind up paying more each month to roll the loan over and get further behind. An installment loan is better even than a credit card, because you're not tempted to keep borrowing again until it's paid off. --anon