When you have a poor credit score, people will often tell you that taking out a personal loan is the worst thing you can do for yourself and your credit. This, however, is not always the case. If you can use personal loans responsibly, they can actually raise your credit score rather than damaging it.
In fact, if you can qualify for a loan through a reliable lender, you can start down the path that leads to a better, brighter financial future for you and your family. Of course, finding a lender that will not hold your bad credit against you can prove to be a challenge, but if you’re willing to search long enough and hard enough, it is more than possible.
Go For a Secured Loan
As mentioned above, qualifying for a loan when your credit score is less than perfect can be difficult. While you might not find someone who will just hand over the cash once you sign on the dotted line, many people with poor credit find that they have a much easier time qualifying for a secured loan. This is a loan that is backed by some kind of collateral, like a vehicle, a piece of property, or even something like a valuable piece of jewelry. Just make sure that you can actually meet the terms, conditions, and general repayment of the loan because if not, your valuable possessions can and most likely will be taken from you.
Don’t Go for Crazy Interest Rates
Often times, when people with bad credit are approved for a loan, secured or unsecured, the interest rates will be a little higher than average. This is the lender’s way of protecting himself. You have to understand that, regardless of the circumstances, your past mistakes have made you appear unreliable and risky. As such, it is normal to have to pay slightly more than the norm for your interest rates. However, this does not mean that you should go for an outrageous interest rate, as is often offered by less than reputable lenders. Higher interest rates make the loan harder to pay off, which can end up hurting your credit score rather than helping it. Research the average interest rate for loans in your area, and be prepared to go slightly above that rate but not too far outside of the norm. It’s all about finding the perfect balance.
Don’t Go Too Big
Sometimes, the loan amount that you are actually approved for may come as a “pleasant” surprise to you. However, if you end up being approved for more than you actually need, fight the urge to take all of it. While the extra money can sometimes seem like “free” money, remember that it is not and that it comes with a price–the price being the interest rate. Also keep in mind your long-term goal, which is to improve your credit score. If you bite off more than you can chew, this is only going to hurt you in the long run, rather than helping you. Having a clear idea of what you are doing and why and keeping that in mind at all times can keep you from getting in over your head and can lead the way to actually accomplishing your long-term financial goals.
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Category: Money Basics