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Alternatives to Personal Loans for People with Bad Credit

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If you have experienced job loss, medical bills, or other financial challenges, maintaining a good credit rating can be difficult. With a good credit rating you can meet temporary financial challenges by getting a personal loan from a bank or lending institution. But if you have bad credit, it can be difficult or impossible to get a personal loan from a bank. What can you do to get a bad credit personal loan? You have some options, but you need to be careful.

Secured Credit Card

A regular credit card is a form of unsecured loan. This means that the lender grants you future access to money based solely on your past credit history. You need not put up any collateral, such as is required for a home equity loan or an auto loan.

But if you have bad credit, you may not be able to get an unsecured loan. As a way to help you rebuild your credit rating, many banks offer secured credit cards. If you are approved for a secured credit card, you are required to make a cash deposit into the credit card account. You can then use the credit card to make purchases up to the amount of your deposit. Then, when you make your regular monthly payment, it reflects positively on your credit rating.

A secured credit card is not a loan. It is simply a way to establish better credit. After a year or so, you may be eligible for a regular credit card. But watch out-some unscrupulous secured credit card companies charge exorbitant fees.

Payday Loans

If you have a steady job and quickly need cash for an emergency, you might consider a payday loan. This is a high-interest short-term loan typically obtained from a neighborhood payday loan store.

Let's say you need to borrow $400 today to get your car fixed. Your next payday is in two weeks, and your take-home pay is $1,000. The payday loan office will ask you for a check in the amount of $400 plus interest. The check is post-dated two weeks to your next payday. You give them the check and walk out of the office with $400 cash.

On your next payday the loan office will cash your check. If your check bounces, you may be subject to felony prosecution, or the lender will agree to roll over your loan to the next payday-for a steep fee.

Payday loans are expensive. Loan fees are calculated per $100 borrowed, and typically range from $10 to as high as $30 per $100 borrowed. If you are charged $15 per $100 borrowed, a 14-day loan of $400 will cost you $60 in interest. That's an annual percentage rate (APR) of 390%. Think about it-do you really want to pay $60 to borrow $400 for two weeks? And don't forget that your next paycheck won't be $1,000 - it will be $540, because you will have repaid the loan.

Peer-to-Peer Lending

Also known as person-to-person lending, P2P lending, or social lending, peer-to-peer lending may be a good option if you have access to a lending group. Originally, peer-to-peer lending was developed by tightly knit ethnic groups who trusted one another and who may not have had access to traditional banks. At its most basic, the group creates a pool of money from which members may take out loans, typically for purposes such as a wedding, building a home, or starting a small business. The money is then repaid, sometimes with a low interest charge.

Traditional peer group lending depends upon a high level of personal knowledge and trust among the participants. For the general public, commercial peer-to-peer lending sites are operating on the Internet and are rapidly gaining popularity. Peer to Peer lending sites can generally help people of all credit types. Since the individuals lending the money stand to reap a greater return on their investment when lending to people with bad credit - you have many that are willing to do it. Peer to peer or social lending is becoming a great way to get cash without using banks or credit cards.

Getting a personal loan with bad credit can be difficult but if you take your time and explore all of the available options you will certainly find people willing to lend the money. As always, proceed with caution since the loans available to people with bad credit will generally have higher rates and fees associated with them.