Financing a business through borrowing money is different to taking out loans for personal use, which we will focus more on today, and we’re particularly thinking about people having trouble with a bad credit history. There are a few ways you can build up your credit score again, and different products are available to you from banks although some will be more suitable than others depending on your situation.
There are two different types of loans, secured and unsecured. A secured loan is for a vehicle or home. If you should fail to pay on the loan, the lender will reclaim or repossess the asset. Because they are secured by a physical asset, they are not as difficult to get as unsecured loans.
Loan to Value Ratio
With any car finance or mortgage applications, the lender wants to know that they can get their investment back out of the asset. They will not lend the funds to purchase a car or home until they know the value of the property that will be used as collateral. The closer the borrowed amount is to the actual value, the higher the “loan to value” ratio is. People with excellent credit can typically borrow up to 100% of the value of the asset. Those with less attractive credit can expect to only borrow up to 80% of the asset’s market value. When you are applying for bad credit mortgages, plan on either putting more money down or finding a home that is being sold for less than the market value.
Secured Credit Cards
Credit cards are typically secured against a savings account. Known as secured credit cards, they are ideal for rebuilding your credit score. Before receiving the credit card you will be required to open a savings account with the credit card company. You will submit funds that are equal to your credit limit. The lender will secure those funds and can legally confiscate them if you should default on the credit card.
Unsecured Credit Cards
There are some unsecured credit cards available for people with low credit scores. Expect the limits to be very low and the interest rates to be extremely high. While it’s not advisable to carry a balance on any credit card, using them and paying them off every month will help you increase your credit score and your overall credit situation.
Another option is to have a family member or close friend co-sign for you to get the asset or the credit card. A co-signer agrees to take responsibility for the debt if the primary borrower should fail to make the payments. They must have excellent credit themselves and the ability to repay the funds. Failing to pay on any loan with a co-signer will affect your credit and the credit score of your co-signer. As soon as your credit improves to the point that you can get new loans on your own, you should take new loans and have your co-signers name removed from all of your debts.