While many people have the means to pay for what they need, some do not, and that is why loans exist. If you are struggling through an unexpected financial emergency or have an immediate need to make a major purchase, you will likely have to take out a loan. The type of loan you can get and the amount you can borrow largely depends on your credit score.

Loan Approval is Tied to Your Credit Score

When you have bad credit, being rejected for a loan is a like a dash of cold water. The reality is that very few lenders will take a chance on someone who does not manage their money well. If you want a loan with good terms, you will face an uphill climb to getting approved. This challenge is compounded when you need a large sum of money. Even with a steady source of income, the chances of getting a loan approved with bad credit are low. You do have the option of using subprime lenders that are more flexible and do not require a good credit score. You can also consider joining a credit union to benefit from its less restrictive requirements on lending.

Your Interest Rate Will Be Based on Risk

If your credit score is high enough to obtain a loan but still on the low side, the annual percentage rate (APR) will reflect this. The lender will look at your credit history and decide how much of a risk you are before setting the interest rate. Those with excellent credit will get a lower APR because they are a low risk. A low credit score presents higher risk to the lender, and the borrower will pay a higher APR. This is why banks are so strict about loans. They do not want to take the chance that you will not pay back the loan. Subprime lenders are willing to take on high risk borrowers, and they charge very high interests rates to make up for those who default.

Poor Credit Means Higher Deposits and Fees

The higher interest rate is not the only thing that costs more when you have a poor credit score. When using a subprime lender, you will likely pay higher loan fees as well. Along with interest, these bigger fees act as a cushion against bad-credit borrowers who do not pay their loans back. If you choose a secured loan bad credit, you will have to pay more money up front than those with good credit. For example, if you decide to buy a vehicle, you would be required to make a more substantial down payment or present the dealer with a trade-in vehicle to lower their risk with you. As a last resort, if your credit is very bad, you can consider a collateral loan where you use property or a vehicle as security during the application process.

Having a Co-signer Can Help

One way to reduce the cost of a loan when you have poor credit is to get a cosigner. This can be a family member or a close friend who has good credit. A cosigner agrees to share the responsibility of the loan with you and will repay it if you cannot. This means less risk for the lender, leading to smaller deposits and a better interest rate.

If you need a loan and are unsure how to get one, the experienced staff at DrCredit is waiting to help you explore your options.