One of the best ways to improve your FICO score after a financial slump is to get and start paying off a loan. But with so many different type of loans out there, you may be concerned about which is the best to use to get what you need, at a rate you can afford. Here are some of the options that you have to take out a loan that will work to your benefit, even if your credit isn’t where you’d like it to be.
Conventional Loans
These types of loans can be broken down into categories and are typically reserved for mortgages that are not backed by some government agency like the VA. Because these are typically home loans, these are not the best loans for people with bad credit; since they involve home-buying, lenders have more stringent requirements to receive one. These can be broken down into two loan types:
- Conforming Loans
These follow Fannie Mae and Freddie Mac’s guidelines, with the main guideline being the maximum loan amount that can be taken out.
- Non-Conforming Loans
These do not follow the official guidelines and consist of jumbo loans for the purchase of large homes.
If you have bad credit, these are probably not the loans that you should be considering, but they are significant in the financial world, and are a potential option that are worth mentioning.
Secured Loans
These types of loans are relatively easy to obtain when you have bad credit. This is because when you take out the loan, you offer your lender some form of collateral, usually such as your house, car, or a stock market investment. In the event that you fall behind on your payments, they will take your collateral to forgive the debt. Your collateral serves as insurance for the lender, and the larger your collateral, the higher the loan will be, and sometimes the better the interest rate as well. These types of loans are also good if you do not have a long credit history or have not taken many loans out before.
If you are new to a line of credit or have recently filed for bankruptcy, then this type of loan is an option that you should seriously consider. You are more likely to be accepted applying for this loan than for an unsecured loan, because your collateral will reduce your risk with lenders. Not only that, but this type of loan will also motivate you to stay on track of payments so that you do not have to surrender your property to the lender.
Unsecured Loans
This is almost the same thing as a secured loan, however there is no requirement for a commitment of collateral. Sometimes called personal or signature loans, the terms and interest rates on these loans depend on your credit history and your current financial situation. That is not to say that these are impossible to get if you have bad credit. In fact, there are some types of unsecured personal loans that are made specifically for people with bad credit or poor financial histories, such as debt consolidation loans. These are some of the most versatile loans on the list as they can help you purchase big ticket items or, in the case of the debt consolidation loan, can help you get your financial life back under control.
If you have a low credit score and you are looking to build a solid payment history, then this is the loan for you because you are free in terms of payment. For instance, if you have to pay a large sum at the end of each payment cycle, with this type of loan you can divide your amount into smaller, even amounts to pay throughout the cycle. This will allow you to meet your financial obligations and have enough money left for other things, like paying for groceries or adding to a savings account. This type of loan is also helpful if you have a low FICO score, but need money fast because of your financial situation; some lenders offer cash loans as a form of personal loan. Check with your lender to see if this is a feasible option for you.
Open-Ended Loans
Open-ended loans are loans that do not have a fixed end date. Credit cards are the most popular example of this type of loan. These are good for long-term needs, such as building or renovating a home. Home equity lines of credit are also good examples of this type of loan. These have the longest commitment of all the loans on this list, so you shouldn’t commit to an open-ended loan without serious discussions with your lenders, financial institutions, and financial advisors about your current situation. Because of the undefined lengths of these loans, which often entail interest rates, these are probably not the best option if your credit is low, but are great to have in mind once you get back on stable financial ground.
Closed-Ended Loans
These are loans that do have set end dates and cannot be borrowed from again. The loan gets smaller with each payment, and if you want to borrow more, then you have to take out a whole new loan. Traditional fifteen or thirty-year mortgages and student loans are common types of closed-end loans. These are other long-term financial decisions that should not be entered into lightly and are typically reserved for major purchases, such as houses, cars, or starting your own business. When opening a closed-ended loan, it is also critical to know precisely how much money you need, so that you don’t find yourself strapped for cash after your purchase, and don’t end up borrowing more than you need, or can afford.
Depending on your lender and your financial circumstances, your options may be constrained dependent on your current situation. Furthermore, when seeking a loan to try to improve your credit, try to work with types of loans that you have otherwise not worked with before. Diversifying your financial history is a good way to demonstrate to lenders that they can trust you with their money. Hopefully, these explanations will help make the choice easier as to which loan to pursue when you have bad credit.