Should You Take Out a Loan With Bad Credit?


Taking out a loan when you have bad credit, and if you are trying to rebuild your credit after financial difficulty, you may be wondering if taking out a loan at this time could cause your credit score to worsen. The fact of the matter is that there are bad credit loans that are written for those individuals who have experienced a difficulty in their borrowing past and are now trying to rebuild their credit file. And these loans can actually help you accomplish the task of rebuilding your credit if you are a responsible borrower and follow good repayment practices.

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Types Of Loans For Bad Credit

There are two basic types of loans that those with bad credit can take out. The first of these is the secured loan, or secured personal loan. This loan is written out based on the ability of the borrower to pledge collateral. Collateral is simply something of value that you allow the lender to place a lien upon until the loan is repaid, like a car or home. Pledging collateral gives the lender an added layer of security that despite your bad credit in the past, you will make good on your promise to pay; if you fail to pay, the lender can sell the collateral to apply toward repayment.

The other type of loan is the unsecured loan. This type of loan is one that is taken out without collateral pledged, and is riskier for the lender. Because you are not providing extra security, the lender is at a greater risk, and may compensate by charging extra fees or by charging more interest on the principal amount that you borrow. You may be asked to apply with a cosigner for unsecured personal loans when you have bad credit.

Borrowing Limits

Because you have bad credit, you will usually not qualify for more than $5,000 with a lender until you have established yourself as a good borrower with them. You can borrow smaller amounts of course, beginning at around $300. You will typically be asked to repay the lender in monthly payments over the course of 12 months to 24 months.

Building Your Credit With A Bad Credit Loan

When you are approved for your bad credit loan, the time is right for you to become a responsible borrower and thus a good steward of your credit. To become the type of borrower that lenders seek for their loan products, the most important thing that you can do is pay your loan payment on time each and every month, and in turn, the lender will report your positive credit behavior to the credit reporting bureaus, which can raise your credit score. If you are sending a payment via U.S. mail, allow ten days for the payment to travel by mail and be processed.

A better way is to set up online payments or automatic payments that are taken from your checking account each month on a certain day. Being late on just one loan payment with your bad credit loan can cause your credit score to become even lower.


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