When an organization or an individual lends somebody money, there’s always a risk that the person might not pay the money back. That’s why lenders carefully assess the credit risk of potential borrowers—that is, how much risk there is that the borrower will be unable to repay the loan.
If you need money fast, but don’t have something valuable to offer as collateral, there’s very little chance that you’ll be able to get a loan from a bank and you’ll probably need to find somebody offering bad credit emergency loans but before you take that step, you need a good understanding of what this involves.
The five Cs of credit
The so-called Five Cs of credit are the points that lenders normally consider before deciding whether to approve a loan to somebody:
1. The borrower’s Character
Is this a responsible individual? Have they repaid other loans on time in the past? Or do they habitually max out their credit cards and use one of them to pay off the other? Someone who has demonstrated unsteadiness of character is much less likely to secure a loan.
2. The borrower’s Capacity
To calculate someone’s capacity, compare the borrower’s monthly debt repayments and monthly income. When debt repayment uses up most of the borrower’s income, the borrower is more likely to default on a payment.
3. The borrower’s Capital
If the borrower has borrowed money to put into an investment, but has also contributed a substantial amount of their own money, they are less likely to default on repayment.
4. The borrower’s Collateral
In the case of car or home loans, lenders can be fairly sure of getting their money back. If the borrower fails to make the monthly payments, the lender can just repossess the car or home, which they can then sell to recover their money.
5. The Conditions of the loan
The general context surrounding the loan, such as the state of the industry the borrower works in, how secure the borrower’s job is, etc., can also help lenders determine the person’s credit risk.
FICO is a company best known in the finance world for creating a credit scoring system for quantifying the trustworthiness of borrowers.
In the USA, the FICO credit scoring model is used by the vast majority of financial institutions. Many other countries also have their own credit scoring systems.
FICO scores are determined by considering the borrower’s payment history and outstanding debts, as well as the period of time spanned by the available credit history, and the new credit and/or credit mix of that borrower.
Getting a loan when you have a bad credit score
If you have a bad credit rating, banks will not give you a loan, because they know you probably won’t be able to repay it. However, bad credit loans are available for people with bad credit scores. They do not require collateral, but they normally have high interest rates and fees.
You still have to meet some criteria to get a bad credit loan. Lenders need to feel confident that whatever financial problems you had are now resolved and that your income is enough to cover the loan repayments.
Bad credit loans
If you’re in a really bad financial situation and do not have good credit a bad credit loan can be of great help. However, you need to do a little research to find the best lender and here are some steps to take to do that:
1. Check out the APR (Annual Percentage Rate) on offer
When paying back any loan, you’ll pay the amount you borrowed, plus interest, plus various fees and charges. The APR of a loan tells you how much the loan will cost you per year, taking into consideration all these amounts. That’s why comparing the APR of different offers is better than just comparing the interest rates.
2. Check out the loan amounts on offer
Some lenders are prepared to loan any amount, but quite a few only offer loans over a certain minimum. Other lenders may not offer loans for large amounts – so whatever your situation is, you need to make sure of this before you choose.
3. Check out the repayment term
After the APR, the next most important factor to consider is the repayment term: the length of time you have in which to complete your repayments. If you are paying back your loan over a long period, your monthly payments will be lower. On the other hand, the more months there are in which you are paying interest, the more interest you will have paid overall.
As well as checking these points, you should also find out what is involved in the loan application process. How long does it take, and how quickly after application will you get your money? Last but not least, try and find out whether other clients have had good or bad experiences with this lender.
Lending or borrowing money always involves a certain amount of risk, but if you arm yourself with as much information as possible, these risks can be minimized.
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