A loan is a type of debt. All material things can be lent but this article focuses exclusively on monetary loans. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.
The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. A borrower may be subject to certain restrictions known as loan covenants under the terms of the loan.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding. Bank loans and credit are one way to increase the money supply.
Legally, a loan is a contractual promise of a debtor to repay a sum of money in exchange for the promise of a creditor to give another sum of money.
Secured
A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
Unsecured
These may be available from financial institutions under many different guises or marketing packages:
* credit card debt,
* personal loans,
* bank overdrafts
* credit facilities or lines of credit
* corporate bonds
The interest rates applicable to these different forms may vary depending on the lender, the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.
Abuses
Abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her. Where the moneylender is not authorised, it could be considered a loan shark.
Credit card companies in some countries have been accused by consumer organisations of lending at usurious interest rates and making money out of frivolous "extra charges
Tuesday, June 19, 2007
Mortgage Matters
GROUNDBREAKING: Housing starts fell in May, just as analysts had expected. More building permits were issued than most had expected. I have a convoluted explanation that's probably wrong.
Starts fell 2.1 percent in May from the previous month, and they fell 24.2 percent from the previous May. To give you raw numbers, starts were at a seasonally adjusted annual rate of 1.474 million last month, and at a rate of 1.944 million in May 2006. The big decline shows the extent of the housing slump.
Permits are a different story. They were issued last month at a seasonally adjusted annual rate of 1.5 million units. That's up 3 percent from April and down 21.7 percent from May 2006.
You have to view these numbers in this context: There are a lot more houses for sale, new and used, than there are buyers. Supply is far higher than demand, and house prices have been dropping. No wonder housing starts are down.
Here's a stab at an explanation for the rise in permits: Builders are having trouble selling the houses that they're building or already have completed. Yet the same builders own vacant land that they were planning to build on. Now they know that it's going to be a long time before there's enough demand to warrant building houses on the vacant land that they own.
So they want to sell the land. And if the vacant lots have building permits, the land is more valuable. That's my guess at why permits are up while completions are down.
Blogger Calculated Risk says: "This report shows builders are still starting too many projects, and that residential construction employment is still too high." In the comments section of that posting, someone points out that permits for single-family houses are way down, and permits for multifamily buildings haven't fallen as much. Another commenter observes that "it may be signalling a shift towards renting from buying/owning." Sounds about right.
Bob Walters, chief economist for Quicken Loans, says: "Long-term interest rates are conducive to housing, making home ownership a reality for many people, but until the inventory of unsold homes dissipates somewhat, home builder sentiment and therefore the number of housing starts will remain in their current range throughout 2007."
WACKY YIELDS: When bond yields skyrocket, as they've done in the last two weeks, there inevitably is an overreaction. They always climb too high, then fall back. Not always all the way back, but at least part-way back. That's what happened late Friday.
The yield on the 10-year Treasury finished at 5.16 percent Friday afternoon, down from 5.23 percent the previous day, and a tenth of a percentage point off Tuesday's 5.26 percent. Freddie Mac's required net yields -- another indicator of mortgage rates -- have taken an up-and-down ride, too. One Freddie Mac yield that I track rose to 6.63 percent Tuesday and fell to 6.48 percent Friday afternoon. It's up 4 basis points so far this morning.
Bankrate's weekly rate survey is conducted on Wednesdays. Last week, the average 30-year rate was 6.84 percent, the highest in 11 months. If that survey were to be taken today, the average 30-year fixed would be about 6.75 percent, or 9 basis points lower. My hunch -- and my hunch isn't necessarily any better than yours -- is that bond yields and mortgage rates won't drop much more. I think they'll stabilize around 6.75 percent, and they're more likely to rise than to fall.
FLOATERS: I got a question this weekend from someone in Las Vegas who is interested in buying a floating home. Do I know any lenders?, the reader asked. No, I don't know of any in Las Vegas. But if you dream of owning a floating home, check out my article on financing floating homes, written five years ago. It sounds like a cool lifestyle, huh?
SUBPRIME WOES: "A few weeks ago," The Wall Street Journal reports, "the market for bonds backed by risky home loans looked like it was calming down. Now, problems are quickly mounting." Moody's has cut the ratings on $3 billion worth of securities backed by subprime mortgages.
The downgrades "represent less than 1 percent of the over $400 billion in subprime mortgage-backed bonds that were issued in 2006," the Journal helpfully notes.
In other news, just 3 million people filed bankruptcy this week, only 1 percent of the U.S. population. Move along, nothing to see here ...
JUNK MAIL: Fortune writer Jon Birger writes about a direct-mail solicitation he received from GMAC Mortgage. What's remarkable is the scare tactics that GMAC uses -- implying that Birger's mortgage lender, Washington Mutual, is among the mortgage companies that are "heading for financial trouble because they have made too many questionable loans."
First of all, WaMu is not in financial peril. Second, GMAC credit rating is "several notches below that of WaMu," Birger notes.
CALENDAR: The only compelling economic reports this week come out Tuesday morning, when the Commerce Department counts housing starts and building permits issued. I tend to agree with Calculated Risk, who says: "There is no way the news will be 'good' for housing. If starts decline - as expected - that means more weakness in the housing sector. And if starts unexpectedly increase that just means more supply and more weakness to come."
Starts fell 2.1 percent in May from the previous month, and they fell 24.2 percent from the previous May. To give you raw numbers, starts were at a seasonally adjusted annual rate of 1.474 million last month, and at a rate of 1.944 million in May 2006. The big decline shows the extent of the housing slump.
Permits are a different story. They were issued last month at a seasonally adjusted annual rate of 1.5 million units. That's up 3 percent from April and down 21.7 percent from May 2006.
You have to view these numbers in this context: There are a lot more houses for sale, new and used, than there are buyers. Supply is far higher than demand, and house prices have been dropping. No wonder housing starts are down.
Here's a stab at an explanation for the rise in permits: Builders are having trouble selling the houses that they're building or already have completed. Yet the same builders own vacant land that they were planning to build on. Now they know that it's going to be a long time before there's enough demand to warrant building houses on the vacant land that they own.
So they want to sell the land. And if the vacant lots have building permits, the land is more valuable. That's my guess at why permits are up while completions are down.
Blogger Calculated Risk says: "This report shows builders are still starting too many projects, and that residential construction employment is still too high." In the comments section of that posting, someone points out that permits for single-family houses are way down, and permits for multifamily buildings haven't fallen as much. Another commenter observes that "it may be signalling a shift towards renting from buying/owning." Sounds about right.
Bob Walters, chief economist for Quicken Loans, says: "Long-term interest rates are conducive to housing, making home ownership a reality for many people, but until the inventory of unsold homes dissipates somewhat, home builder sentiment and therefore the number of housing starts will remain in their current range throughout 2007."
WACKY YIELDS: When bond yields skyrocket, as they've done in the last two weeks, there inevitably is an overreaction. They always climb too high, then fall back. Not always all the way back, but at least part-way back. That's what happened late Friday.
The yield on the 10-year Treasury finished at 5.16 percent Friday afternoon, down from 5.23 percent the previous day, and a tenth of a percentage point off Tuesday's 5.26 percent. Freddie Mac's required net yields -- another indicator of mortgage rates -- have taken an up-and-down ride, too. One Freddie Mac yield that I track rose to 6.63 percent Tuesday and fell to 6.48 percent Friday afternoon. It's up 4 basis points so far this morning.
Bankrate's weekly rate survey is conducted on Wednesdays. Last week, the average 30-year rate was 6.84 percent, the highest in 11 months. If that survey were to be taken today, the average 30-year fixed would be about 6.75 percent, or 9 basis points lower. My hunch -- and my hunch isn't necessarily any better than yours -- is that bond yields and mortgage rates won't drop much more. I think they'll stabilize around 6.75 percent, and they're more likely to rise than to fall.
FLOATERS: I got a question this weekend from someone in Las Vegas who is interested in buying a floating home. Do I know any lenders?, the reader asked. No, I don't know of any in Las Vegas. But if you dream of owning a floating home, check out my article on financing floating homes, written five years ago. It sounds like a cool lifestyle, huh?
SUBPRIME WOES: "A few weeks ago," The Wall Street Journal reports, "the market for bonds backed by risky home loans looked like it was calming down. Now, problems are quickly mounting." Moody's has cut the ratings on $3 billion worth of securities backed by subprime mortgages.
The downgrades "represent less than 1 percent of the over $400 billion in subprime mortgage-backed bonds that were issued in 2006," the Journal helpfully notes.
In other news, just 3 million people filed bankruptcy this week, only 1 percent of the U.S. population. Move along, nothing to see here ...
JUNK MAIL: Fortune writer Jon Birger writes about a direct-mail solicitation he received from GMAC Mortgage. What's remarkable is the scare tactics that GMAC uses -- implying that Birger's mortgage lender, Washington Mutual, is among the mortgage companies that are "heading for financial trouble because they have made too many questionable loans."
First of all, WaMu is not in financial peril. Second, GMAC credit rating is "several notches below that of WaMu," Birger notes.
CALENDAR: The only compelling economic reports this week come out Tuesday morning, when the Commerce Department counts housing starts and building permits issued. I tend to agree with Calculated Risk, who says: "There is no way the news will be 'good' for housing. If starts decline - as expected - that means more weakness in the housing sector. And if starts unexpectedly increase that just means more supply and more weakness to come."
What is Not In Your Score
FICO® scores consider a wide range of information on your credit report. However, they do not consider:
Your race, color, religion, national origin, sex and marital status.
US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
Your age.
Other types of scores may consider your age, but FICO scores don't.
Your salary, occupation, title, employer, date employed or employment history.
Lenders may consider this information, however, as may other types of scores.
Where you live.
Any interest rate being charged on a particular credit card or other account.
Any items reported as child/family support obligations or rental agreements.
Certain types of inquiries (requests for your credit report).
The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
Any information not found in your credit report.
Any information that is not proven to be predictive of future credit performance.
Whether or not you are participating in a credit counseling of any kind.
Your race, color, religion, national origin, sex and marital status.
US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
Your age.
Other types of scores may consider your age, but FICO scores don't.
Your salary, occupation, title, employer, date employed or employment history.
Lenders may consider this information, however, as may other types of scores.
Where you live.
Any interest rate being charged on a particular credit card or other account.
Any items reported as child/family support obligations or rental agreements.
Certain types of inquiries (requests for your credit report).
The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
Any information not found in your credit report.
Any information that is not proven to be predictive of future credit performance.
Whether or not you are participating in a credit counseling of any kind.
Facts & Fallacies
Fallacy: My score determines whether or not I get credit.
Fact: Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.
Fallacy: A poor score will haunt me forever.
Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. See how improved scores can lead to savings.
Fallacy: Credit scoring is unfair to minorities.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.
Fallacy: Credit scoring infringes on my privacy.
Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.
Fallacy: My score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Fact: Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.
Fallacy: A poor score will haunt me forever.
Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. See how improved scores can lead to savings.
Fallacy: Credit scoring is unfair to minorities.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.
Fallacy: Credit scoring infringes on my privacy.
Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.
Fallacy: My score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
How Credit Scoring Helps You
Credit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased.
Credit scores – especially FICO® scores, the most widely used credit bureau scores – have made big improvements in the credit process. Because of credit scores:
People can get loans faster.
Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's “score cutoff”. Scoring also allows retail stores, Internet sites and other lenders to make “instant credit” decisions.
Credit decisions are fairer.
Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.
Credit “mistakes” count for less.
If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called “knock out rules” that turn down borrowers based solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report.
More credit is available.
Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for “automatic approval” benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.
Credit rates are lower overall.
With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses using scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information - including credit scores - available to lenders here. Knowing and improving your score can also lead to more favorable interest rates. Check out an example of the national averages of interest rates and see exactly how much money you might be able to save.
Credit scores – especially FICO® scores, the most widely used credit bureau scores – have made big improvements in the credit process. Because of credit scores:
People can get loans faster.
Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's “score cutoff”. Scoring also allows retail stores, Internet sites and other lenders to make “instant credit” decisions.
Credit decisions are fairer.
Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.
Credit “mistakes” count for less.
If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called “knock out rules” that turn down borrowers based solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report.
More credit is available.
Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for “automatic approval” benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.
Credit rates are lower overall.
With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses using scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information - including credit scores - available to lenders here. Knowing and improving your score can also lead to more favorable interest rates. Check out an example of the national averages of interest rates and see exactly how much money you might be able to save.
What’s In Your Credit Report
Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. Your social security number, date of birth and employment information are used to identify you. These factors are not used in scoring. Updates to this information come from information you supply to lenders.
Identifying Information.
Your name, address, Social Security number, date of birth and employment information are used to identify you. These factors are not used in scoring. Updates to this information come from information you supply to lenders.
Trade Lines.
These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
Inquiries.
When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.
Public Record and Collection Items.
Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
Identifying Information.
Your name, address, Social Security number, date of birth and employment information are used to identify you. These factors are not used in scoring. Updates to this information come from information you supply to lenders.
Trade Lines.
These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
Inquiries.
When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.
Public Record and Collection Items.
Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
How to find a loan with bad credit?
Even though it may seem like it at times, having bad credit isn't the end of the world. While you might think that you'll never be able to get a loan that you desperately need because of your credit score, with a little bit of persistence and some careful preparation you'll find that there are a variety of different loan options available to you. The keys to finding a loan with bad credit are keeping your options open, having the right collateral, and shopping around to find the best interest rate that you can get.
The information provided below should help you to find the best loan that you can, and even provides some advice on what to do if the loan you apply for is denied.
Considering lender options
The first step in finding a loan with bad credit is considering a variety of different lenders so as to find the one that's right for you and your loan needs. There are a number of different lenders out there, so don't limit yourself to simply checking one or two banks in your area for loan rates. Keep in mind the various finance companies, loan offices, mortgage lenders (if applicable), and online lenders that might offer interest rates and loan terms that are comparable if not better than those that are offered by the banks in your area.
Choosing the right collateral
Once you've figured out some of the lenders that you might request a loan quote from, you need to determine what you're going to use as collateral for the loan. Collateral is essential for a bad credit loan, since it serves as a guarantee to the lender that they'll get their money back no matter what and helps to convince them that you're worth the risk of lending money to.
It's best to choose collateral that has a higher value than you're attempting to borrow, especially if the collateral that you're considering is an item that would be easy to find a market for if necessary. The higher the value of the item and the easier it is to find a ready market for it, the greater the chance that you'll not only get a loan but also a good interest rate on that loan.
Shopping for a loan
After you've decided upon what you want to use as your collateral, it's time to start shopping around for a loan. Request loan quotes from all of the lenders that you'd decided upon previously, using the same collateral as the basis for each quote. Compare the interest rates and loan terms that are offered by each lender, finding the loan quote that's best for you and applying for that loan.
What to do if you're denied a loan
If you get turned down for a loan, remember that there are still other options available. Go back to the quotes that you had received previously and apply for the next-best loans. if you're unable to get one of the next two best, you might want to begin your search again and consider a few additional lenders that you hadn't previously.
You might also want to attempt to get a pre-approval from a lender, which means that they review all of your information as though you were submitting your actual application while you're still getting your loan quote. This can save you time and frustration, since a pre-approval means that should you apply for the loan that you're pre-approved for you'll be already approved for the loan at the quoted rate.
The information provided below should help you to find the best loan that you can, and even provides some advice on what to do if the loan you apply for is denied.
Considering lender options
The first step in finding a loan with bad credit is considering a variety of different lenders so as to find the one that's right for you and your loan needs. There are a number of different lenders out there, so don't limit yourself to simply checking one or two banks in your area for loan rates. Keep in mind the various finance companies, loan offices, mortgage lenders (if applicable), and online lenders that might offer interest rates and loan terms that are comparable if not better than those that are offered by the banks in your area.
Choosing the right collateral
Once you've figured out some of the lenders that you might request a loan quote from, you need to determine what you're going to use as collateral for the loan. Collateral is essential for a bad credit loan, since it serves as a guarantee to the lender that they'll get their money back no matter what and helps to convince them that you're worth the risk of lending money to.
It's best to choose collateral that has a higher value than you're attempting to borrow, especially if the collateral that you're considering is an item that would be easy to find a market for if necessary. The higher the value of the item and the easier it is to find a ready market for it, the greater the chance that you'll not only get a loan but also a good interest rate on that loan.
Shopping for a loan
After you've decided upon what you want to use as your collateral, it's time to start shopping around for a loan. Request loan quotes from all of the lenders that you'd decided upon previously, using the same collateral as the basis for each quote. Compare the interest rates and loan terms that are offered by each lender, finding the loan quote that's best for you and applying for that loan.
What to do if you're denied a loan
If you get turned down for a loan, remember that there are still other options available. Go back to the quotes that you had received previously and apply for the next-best loans. if you're unable to get one of the next two best, you might want to begin your search again and consider a few additional lenders that you hadn't previously.
You might also want to attempt to get a pre-approval from a lender, which means that they review all of your information as though you were submitting your actual application while you're still getting your loan quote. This can save you time and frustration, since a pre-approval means that should you apply for the loan that you're pre-approved for you'll be already approved for the loan at the quoted rate.
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