Some loans are targeted toward specific things, often a car or a house, while others can be used just for about anything. That’s where personal loans come in.
You can get a personal loan from any number of sources with terms and interest rates that vary wildly. But what if your credit isn’t stellar? What if some unfortunate events in your financial past have left you with a FICO score that you’re not proud of? How does somebody with damaged or no credit get a personal loan?
The short answer: It's very difficult, especially if you're looking for an unsecured loan. But if you do conclude that a personal loan is the best strategy for you, here are six routes you can take.
1. Your Home
If you own all or at least part of your house, condo or co-op, compare the terms on a home-equity loan or a home equity line of credit (HELOC) to the best rates you can find on a personal loan. Because you’re pledging an asset as collateral for the loan, you should be able to qualify, as long as you have a steady income to make payments. And you might get a tax deduction, too.
2. A Credit Union
If a traditional bank turns you down, head to a local credit union. Credit unions are opening themselves up to all sorts of clients nowadays and, as nonprofit organizations, geared towards serving members (rather than making money), they often offer more generous terms, or consider higher-risk types, than banks do.
3. An Internet Bank
Online banks don’t have to pay the overhead and other high costs associated with brick-and-mortar institutions. This allows them to offer lower rates and, often, to say "yes" to people with lower credit ratings when conventional institutions would say "no." Of course, they have their disadvantages, too.
4. Peer-to-Peer Lending
Instead of going to a financial institution, borrow from peer-to-peer (P2P), or individual lenders. Sites like Prosper and Lending Club are two of the best-known sources for finding lenders. All you have to do is go to one of these sites, post the details of your need, and wait to see if anybody will make the loan. Your credit history is a part of the evaluation process. But, as the explosion in crowdfunding attests, individual lenders are more likely to accommodate the individual.
5. Family or Friends
The old advice of never taking money from somebody you know is true for so many reasons. A lot of emotional baggage comes along with borrowing from loved ones. If you do plan to approach friends or family, do it the right way. Make it a business arrangement: Put the loan terms in writing, expect to pay interest near the same amount as you would at a financial institution and of course, make sure you make those payments on time each month.
6. A Co-Signer
If you can’t get a loan on your own, consider getting a cosigner. Lenders like a cosigner because they can go after that person if you fail to make payments on your loan. If you are turning to family or friends, this might be a more palatable option than asking them for funds outright. But let us repeat: Should you fall behind or default on your repayments, your cosigner is on the hook.
The Bottom Line
Unlike so many other types of financing, personal loans are available to just about anybody, regardless of credit history. Expect to pay more in interest if your credit score is low. If it is a subprime loan, the terms might be exceedingly oppressive. Stay away from payday loans, which basically ask you to pledge your next paycheck(s), and other predatory practices.
Whatever the source and nature of the loan, you need to carefully study the terms before signing. If they're too tough, perhaps you should think twice about assuming debt. Taking a loan at the wrong time could force you deeper into a hole that's hard to surmount, especially if your credit score is already low. Concentrate instead on financial and credit repair – and it won't take long before lenders start coming to you.