Having no credit or poor credit is a major obstacle to obtaining a loan because you are seen as a high-risk client that standard could and leave the lender holding a bag of worms. It's just a fact that until you raise your credit score, you will not fit the standard lending guidelines that traditional, large banks have to follow.
If you are turned down for a loan or do not want to get stuck paying high, subprime interest rates, here are five alternatives to consider:
Use a home equity line of credit
If you have enough equity in your property, you can get a low interest, deductible credit line to spend as you wish.
Of course tapping your home equity puts their property at risk if you can not pay the debt. But if you have reliable income and are disciplined about paying down a line of equity, it is a low-cost option, regardless of their credit score.
Apply for Credit Unions
Credit unions are similar to banks but are owned by their members, who usually have something in common: how to work in the same industry or living in the same geographical area. Credit unions are nonprofit organizations that pass through earnings to members in the form of lower rates and greater customer service.
Visit findacreditunion.com to find a credit union near you and give them a call to discuss getting a personal loan. Compare loans from different institutions, so you know you're getting the lowest interest rate possible before signing the final paperwork.
Get a Peer to Peer Loan
Peer to peer or P2P lending has been around since 2005. It is an online platform that allows you to borrow directly from an individual, rather than from an institution. Peer to peer lending is growing in popularity because it is a simplified process that is a win-win for borrowers who pay low-interest rates and investors who earn high-interest rates. Now you can ask for as little as 6% and make an average return in the double digits; that is quite impressive.
Borrowers post a loan listing that includes the amount they want and why they want. Investors review credit lists and choose the ones that meet your criteria. Peer to peer lenders screen all applicants and check your credit; it becomes part of your investment list. So while your credit score is still a factor, an individual investor can be more understanding of your situation than a traditional bank.
Taking a loan from family or friends
If one of the online peers will not give to you, perhaps you have family or friends who will. Treat a loan from someone who knows only as a serious business transaction that is clearly documented and legally registered.
To avoid complications later, create a written contract that includes the interest rate, payment terms, any collateral you put up for the loan, and what happens if you fail to pay the debt. You can get promissory notes from sites like the lawyer rocket or LegalZoom.
If you are borrowing money to buy a house, the loan must be adequately secured to take advantage of the mortgage interest deduction. To register correctly and manage a home loan with a relative, use a service like nationalfamilymortgage.com.
The bottom line is that an investment family should benefit all involved and should be a last resort. You do not want to risk leaving a close relationship souring more bad debt or a misunderstanding about money.
Appealing to a co-signer
If you do not have a friend or family member who is willing to give you the loan, perhaps with good credit would be prepared to co-sign a loan with you. Someone who knows your situation and trust in your ability to repay the debt would probably be willing to take a chance on you.
Just remember that if you do not pay the debt, the lender will look at your co-signer for full payment. Also, all payment history will be recorded in both your credit reports, which could be devastating to your co-signer if you do not keep your end of the deal and make late payments or default.
If none of these five loan options works for you, do your best to increase your credit score so you can qualify for a traditional loan. A good place to start is to check your credit report for free at annualcreditreport.com and correct any errors that may be hurting your credit score. You can improve bad credit by paying bills on time and not overextending on loans and credit cards.