It is only natural to believe taking on a new debt is the worst way to overcome a dire financial situation. But in fact, the opposite is true. Applying for personal loans with bad credit does mean some concessions must be accepted, but with the right terms and some careful preparation, a loan can solve financial woes.
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There are many ways in which someone can get into financial trouble, but the most common is simply to spend more than is earned. Credit cards can be a major culprit, but there are many everyday pressures that do little to help matters. Thankfully, it is not impossible to get loan approval with low credit scores, and so a route to redemption exists.
But how exactly can a personal loan provide an escape from financial hot water? The extra repayments should be enough to worsen matters, so how can it be of any real benefit? Understanding the options and terms available can explain.
Buying Out Existing Debts
The principal behind the strategy is quite simple. Any new loan that is secured is used to clear some or all existing loans, thus lifting the weight of debt. Getting personal loans with bad credit is dependent on specific factors, but surprisingly the credit score is not one of them. But it is the terms of the loan that make the difference.
For example, if a borrower has 5 loans to their name, with a combined balance of $25,000, then a single loan of $25,000 is needed to buy them all out. But since each individual loan has individual interest rates, the combined monthly repayments are higher than the repayments on a single $25,000 loan.
If the repayments are shown to be lower than the original obligation, getting approval with low credit scores will not be a problem. This is because the lender sees the personal loan will actually lessen the financial burden and lower the risk of defaulting.
Terms That Affect Affordability
So, what are the important terms that bad credit borrowers should look out for? The terms relate specifically to interest rate and the repayment period. Once these are adhered to, securing a personal loan with bad credit becomes a little easier.
The interest rate needs to be at least competitive, which is a challenge for bad credit borrowers to get. However, online lenders are famed for their low interest rates so are the best option. Getting approval with low credit scores is not a problem because the online lenders are experts in bad credit lending.
The loan term is perhaps more significant, since a longer term lowers the size of the monthly repayment sum. This makes the personal loan much more affordable, though it does mean that the amount of interest paid over the lifetime of the loan is higher.
Key Factors To Consider
Lenders are always careful about establishing that a loan is affordable for the borrower. A lower monthly repayment sum is definitely help, but there is a need to satisfy set criteria first. Those applying for personal loans with bad credit have to make clear their ability to make repayments in the long term.
There are two areas that lenders look at in an application. The first is the employment status. Applicants are expected to have held a full-time job for at least 6 months prior to applying.
However, getting loan approval with poor credit scores is almost guaranteed if the applicant has a healthy debt-to-income ratio. This ratio limits the share of income to be used to repay debts to 40%. If the repayments on the new personal loan push the figure above that limit, then the application will be rejected.