Question: I need to borrow $5,000, but my credit is poor. Is that even possible? I was out of work for a while but now I have a job again. What options are available? --Netfan
Answer: Unfortunately, during the recent downturn in the economy, many people saw their credit slipping for the first time, as they had extended periods out of work, and had to choose which bills to pay and which to put off. The housing crisis that hit at the same time only made things worse, as home values dropped and people owed more on their mortgages than their homes were worth. So if you have bad credit, you're not alone, but also like many people, that doesn't mean you're not worthy of being trusted with a loan, now that you have a job again and a way to repay.
Banks don't necessarily see it that way, though. Problems with credit stay on your report for up to seven years, even after the issues that caused them are long past. That means it's harder to get credit now, especially if you need to borrow a substantial amount of money, like $5,000.
It's not necessarily hopeless. Some banks may be stricter, but as long as people have a need, there will be other lenders who are willing to work with those who have the ability to pay a loan back and aren't currently in bankruptcy. They may require some form of collateral, so they can collect more easily if you default, or they may ask that you find a cosigner, who will guarantee payment.
If you have an income sufficient to qualify for a $5,000 loan, there are other lenders who may work with you, even if you don't have anything of value to offer as collateral, such as a home or car. Look online for installment loan lenders who offer loans for those with bad credit. You'll be charged a higher interest rate compared to someone with an excellent credit score, but such lenders are willing to work with those who need money.
You can apply online, and will need a verifiable source of income, such as a paycheck, disability, retirement pay, Social Security or other regular income. You'll also need a bank account in good standing. If you want to get the loan in the name of yourself and your spouse, you can use both your incomes on the application and therefore show a greater ability to repay, but both of you will be legally obligated for the amount of the loan.
Lenders are required to explain all the costs and the interest rate, before you sign. A difference of a few percentage points in interest can add up to a significant amount of money over the life of a $5,000 loan, so it's important to shop around. By searching various websites of different lenders, you can compare different offers and get an approximate idea of the cost. If you think you may be able to receive approval from a bank, you can also try there, especially if you can offer collateral or a co-signer. A credit union may be more willing to work with you than a bank.
If you pay the loan back over a longer time period, each payment will be less, but the total interest cost of the loan will be more, even if the annual interest rate is the same. To save money, borrow for the shortest time possible and pay the loan back sooner, if you can. Most lenders will allow you to pay more than the minimum each month. If, on the contrary, you're unable to make a payment on time one month due to a financial emergency, contact the lender immediately to see what you can work out, to avoid late fees or being in default.
If you ask somebody to co-sign, make sure you both understand what you're agreeing to. If you don't pay, it'll be a black mark against your co-signer's credit too, and if the lender has to sue, he can sue you both to get the money. So be sure you only borrow what you can pay back, if you want to stay friends with your co-signer. --BL, Los Angeles
Credit unions are sometimes willing to work with you, but it's really hard to start being able to borrow money again when you have bad credit, and $5,000 is a big loan, to a lot of lenders who are nervous about loaning out money these days. It may be easier to get approved for a smaller loan and when you've made payments back regularly, borrow the rest of the money. --Al K., Brooklyn
I was surprised how fast some of the online lenders act. I applied, and within a couple hours, they called back, I faxed some documents and the loan was approved and all done, and the money was transferred into my account the next day. --B.G. R.
Loans are expensive, but there are times they actually save money, like moving closer to work to save on commuting, repairing storm damage before it deteriorates further, etc. We figured up how much we were spending on laundromat fees and decided it was cheaper to buy our own washer and dryer over the long run. --Lee