Getting bad credit peer loans is easy. More important is understanding your credit and getting back on track after the loan.
We’ve all been there. Maybe a missed payment hit your credit score or you’ve had bad credit for a while. You might just not have much credit history, a major factor in bad credit but really no fault of your own.
But what do you do when you’ve got bad credit and need a loan?
Banks will probably not even look in your direction. You could get a high-interest credit card but that might be part of the reason you’ve got bad credit in the first place. Besides the temptation from another credit card burning a hole in your pocket, this type of money will hurt your credit score even more.
Credit card debt goes on your credit score as “revolving debt” which is the worst kind and really dings your score.
I’ve been here before, five years ago when I destroyed my own credit score. I was able to get all the credit card debt I wanted…at super-high interest rates. The credit card companies will always give you money – at a price.
But that’s only a shovel to dig yourself deeper. You need a way out of your bad credit dilemma.
I was able to get back on my feet using peer to peer lending and learned a lot about debt. I learned what factors affected my credit score and how to play the system for personal loans at rates I could afford.
What does this mean to you?
It means you don’t have to make the same mistakes I did looking for a peer to peer loan. I took out one loan before I understood the interest rate and hidden fees…and it almost set me back even farther. Fortunately, I learned quickly how to find better loans even on bad credit.
I am not advocating getting yourself in more debt, especially if your bad credit score means higher rates. If you can give yourself three months to fix your credit score with these credit score hacks then you could save thousands on interest.
But sometimes you just need the money, like now. Fortunately, peer loans have become a great way to get the money you need even if your credit score is less than stellar.
More important that getting a bad credit peer loan though is what you do with it and how to get your credit back on track afterwards. After detailing the process of getting a loan, I’ll share what I learned about bad credit and how to game the system to get back on track.
Getting a Bad Credit Peer Loan
Getting a bad credit peer loan is actually pretty easy and a lot like getting a traditional loan from a bank. Lending Club makes personal loans of up to $35,000 and for terms between three to five years. The interest rate on your loan is fixed and you will have several opportunities to reject the loan offer before taking the money.
Your monthly payment on the loan is made by check or automatic withdrawal and paying off your loan can actually help increase your credit score in more than a few ways.
1) Creating a listing on Lending Club or other p2p lending sites takes a few minutes and involves your personal information and income. None of the information on this first screen affects your credit score.
The company will do a “soft check” on your credit to pre-approve your loan and assign an interest rate. This soft check on your credit does not affect your credit score as an inquiry so don’t worry about checking it out.
Your credit score and other factors will put you in a credit rating category. Depending on the loan term and how many you’ve had before, you will be able to see the range of interest rates that might be available. Credit rating categories D through HR (high risk) are generally what most would consider bad credit and will mean rates from 21% to around 36% on an annualized basis.
While you can’t change your bad credit immediately, there are some things you can do to get a lower interest rate on peer loans.
- Shorter-term loans are made at lower rates so if you can make the payments on a three-year loan then you’ll save money on interest
- Lower loan amounts mean lower rates, there’s less risk borrowers won’t be able to repay the loan. It’s just another reason to only borrow as much as you need.
- Repeat borrowers get lower rates. If you need to borrow a larger amount, you might try taking out a smaller loan first and pay it off in a year or two. Most peer to peer lending does not charge an early payment penalty so you can pay your loan off whenever. Most borrowers see significantly lower rates on their second loan. Paying off the first loan will also improve your credit score, adding to your payment history and paying down other debt.
You always want to look at the APR rate listed instead of the borrower rate. APR or annual percentage rate is the actual cost of the loan when you factor in compounding.
Rates can get fairly high for bad credit borrowers but are still well below rates on payday lending or credit cards. That’s why the most popular use of peer loans has been for credit card consolidation and to get out of the cycle of payday loans. Peer loans have fixed payments and a fixed payoff date, giving you a way out of never ending borrowing.
I checked my own rate on Lending Club and was able to get an 11.5% rate, way under the interest charged on my credit card. I used a short-term peer loan to pay off the credit card debt from a recent conference I attended. Since peer loans do not have pre-payment penalties, I can pay off the loan early and not have to worry about the interest rate.
Depending on how bad your credit actually is, you may have to work on it before even getting a peer loan. Below are the average credit scores on the Prosper Rating categories. Your credit score must be at least 640 to get a loan on the site and average credit scores are between 664 and 679 for the lowest three bad credit categories.
If your credit score is too low to get a peer loan, check out a recent post on fixing your credit score fast. I outline the 21 steps I used to add 140 points to my credit score. The list includes bad credit fixes that work in just a few months to some that take longer but add big-time to your FICO score.
If Lending Club offers a loan rate and you accept the terms, you then complete a loan listing that will go on the site for investors to fund. Lending Club itself does not actually make loans but offers investors the opportunity to loan you money and earn the interest on proceeds.
Investor demand for loans is very strong right now so you have a pretty good chance of getting your loan funded. Keep an eye on your loan listing and any requests by the p2p lending site for information. Getting documents submitted quickly is the best way to make sure you get your money as quickly as possible.
People think that all peer to peer loan sites are the same but there is actually quite a bit of difference between them. You can use those differences to get the best peer loan for your needs and at a better interest rate.
How do P2P Lending Sites Fund Your Loan?
The p2p lending site will verify the information on your loan application through your credit report, electronic data and standard verification procedures. They may or may not call your employer to check your information but will certainly call you to verify it.
When your loan is funded, Lending Club will deduct its fee and release the money to your bank account. The peer lending platform charges a fee of between 1% to 5% on your loan, which will come out of the money before it is deposited into your bank account. The rate is pretty standard and you are looking at the high-end 5% for a bad credit peer loan.
While there is nothing much you can do about the origination fee on a bad credit peer loan, there are two fees you can avoid. Most peer lenders charge a late fee, if your payment is more than 15 days late, and a failed payment fee if your check is returned or automatic withdrawal does not go through. Both these fees are $15 each on Lending Club peer lending loans.
Monthly payments on your loan are exactly like a traditional bank or credit card loan. Just sign up for automatic withdrawal or mail a check each month. You can pay off your loan early at any time without any pre-payment fees.
Lending Club Complaints and Shopping Your Loan Around
One of the most common complaints I get from readers is the credit score needed for a loan on Lending Club. You will generally need a credit score of 640 or higher to get approved for a loan and rates can be fairly high for bad credit borrowers.
I always say shop around for your personal loan, even if you have good credit. On almost all of the online loan platforms, you can check your rate without affecting your credit score so it doesn’t hurt to try out a few different options.
For borrowers with credit scores below the Lending Club cutoff, I usually recommend Personal Loans.com which is like a LendingTree for personal loans. You enter your personal information and how much you need and the site will look for the best rates from different lenders. The website sources from traditional bank lenders as well as peer networks and credit scores as low as 580 are accepted.
Getting your Credit back on Track with Peer Lending
One of the best things about peer loans for people with bad credit is that they can actually help you improve your credit score.
First, the regular payments you make on your peer loan will go on your credit report and improve your credit payment history. This is the biggest factor that credit rating agencies look at and will help boost your credit score over time.
One factor that most people don’t consider is that peer loans go on your credit report as “non-revolving” debt since they have a fixed payoff date and other terms. Credit rating agencies like this type of debt better than credit card or “revolving” debt because you cannot continuously keep borrowing on the credit line.
Paying off your credit card debt with a peer loan will help increase your credit score by changing your bad revolving debt for not-quite-as-bad non-revolving debt. Of course, having more debt than you can afford will still be a problem no matter what type it is.
After you’ve gotten your peer loan and the money you need, sit down and really think about how you got into your bad credit situation in the first place. You’ve got the opportunity through the peer loan to get back on track but it could make things worse if you just use it for frivolous spending. Check out a prior article on the site about setting realistic financial goals and a budget you can actually keep for more ideas on putting your financial house back in order.
I get a lot of questions about debt and paying down debt with a peer loan. The first thing I ask people is whether they want to be debt free or just free of bad debt. The question usually gets a puzzled look and silence. Understand the difference between good debt and bad debt first, then figure out how to pay off bad debt while using good debt to meet your financial goals.
Having bad credit is not the end of the world. Most of us have been there and fortunately, there are things you can do about it. Your options are probably more limited but there are still some doors open to you and a bad credit peer loan may be one of the best options. After you get your peer loan, just make sure you use it wisely and get your credit back to where it should be.