If you are one of the unfortunate victims of recession who saw their credit scores dive into a red zone due to unemployment and pay cuts and are having doubts about your ability to secure a loan, do not get discouraged. With current trends in the lending market, many lenders have adjusted their underwriting criteria to suit the needs of people with bad credit.
Unsecured Financing for Bad Credit Is Popular Once Again
Many lenders were heavily relying on secured loans, when a borrower had to pledge some sort of collateral, usually real estate, in order to get financing. However, recent crisis, featuring high foreclosure rates and dropping house prices, had proven such measures to be way less effective than projected. It did not only cause borrowers to seek unsecured financing in fears of unforeseen future, but also showed lenders that there are no absolute guarantees of repayment. That is why unsecured personal loans for bad credit borrowers are gaining popularity once again. Lenders widely offer them to every credit grade possible, provided that some general criteria are met.
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The Rules of the Lending Game
While recent changes have made it possible for bad credit consumers to get unsecured financing, the rules remain quite strict. Since bad credit borrowers pose a high risk of default to lenders, more restrictive lending procedures are enforced.
First of all, it concerns the interest rates on bad credit loans. Unsecured loans are only ahead of collateral-backed loans by few percentage points, ranging in low 20% APRs, and higher. Luckily for borrowers, the interest rates on loans are regulated by government and do have a ceiling, varying from state to state.
Upfront lending fees are also higher. Loan origination fees, commonly waived for prime borrowers, are unfortunately a reality to people with bad credit. Therefore, be prepared that your loan proceeds may be reduced by a couple percentage points to cover the loan origination fees.
Repayment terms are lesser. While terms of loan repayment may be quite comfortable for secured bad credit loans, lenders try to limit durations of unsecured loans. This is due to the fact that bad credit borrowers present less certainty once it comes to future credit behavior when compared to good credit borrowers. So, be prepared to have higher monthly payments on your loan resulting from shorter repayment terms.
The Benefits Are Great
While higher borrowing costs may spoil your mood, overall ease of loan approval has improved tremendously in the past decade. Information technology has eliminated the need for long bureaucratic paperwork processing. Applications are widely accepted online and most approvals feature high turnaround time, usually not exceeding 2-3 days.
Minimal paperwork requirements result in higher approval rates compared with traditional banking procedures. Borrowers, while getting an obvious benefit of receiving cash for their needs, also get a great chance of re-establishing their credit by making timely loan payments. Credit score improvement, arising from bad credit personal loan repayment, often eliminates the need for restrictive terms and rates on subsequent loans, allowing you to enjoy the benefits of low rates on traditional bank loans in the future.
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