Borrowers with bad credit face challenges in securing personal loans, as the unsecured nature of those loans and the borrower's own credit record add to the risk a lender might incur. Still, a diligent borrower has resources for obtaining personal loans, as risk-taking lenders such as cash advance stores and private investors eagerly issue loans to almost any borrower.
Cash Advance Stores
If a borrower needs a small personal loan to meet short-term obligations---making a mortgage payment or paying a utility bill, for example---he may consider using the services of a cash advance company. Cash advance organizations rarely require excellent credit, and many perform no credit checks at all; instead, a cash advance company verifies a borrower's employment and the reliability of his paycheck, then schedules a check or bank draft to obtain its funds as soon as the borrower is paid. Cash advance services are often criticized by financial experts because of high fees and a largely unregulated market, and borrowers should approach these services with a firm understanding of the fees and expectations. Borrowers who are unable to repay a loan in accordance with the company's agreement may be subject to very high fees, late penalties and very high interest rates, but a borrower with bad credit may still find the services convenient and effective.
Independent Financial Institutions
Borrowers who are unable to secure loans with mainstream financial institutions may look to specialized independent lenders who cater to customers with bad credit. A number of these institutions offer personal loans to borrowers who meet basic lending criteria, and some do not perform credit checks at all. In exchange for the increased risk, these lenders often require borrowers to pay very high interest rates; with enough borrowers paying high interest rates, these institutions offset the cost of loans that go unpaid. A borrower should carefully read a lender's terms before submitting an application. Most high-risk lenders charge very high interest rates, but some also charge hefty late fees, payment insurance premiums and other fees that can quickly and significantly increase the cost of the loan. Despite these fees, borrowers who make payments on time with these lenders may find their credit ratings improved enough to secure more favorable financing in the future.
After the financial market crash froze credit markets in the mid-2000s, a trendy new form of lending emerged that enables private individuals and investors to issue small personal loans to other individuals. Known as peer-to-peer lending, these services allow borrowers to post an advertisement on a moderated Internet site to explain their financial needs. Interested investors can read these requests then issue some or all of the requested funds. As the borrower makes regular payments, the company that facilitates the loan distributes funds to all interested investors, then keeps a small portion of the funds for its own profit. Because peer-to-peer lending relies on the investor to decide his own risk and issue his own loans, these services allow bad-credit borrowers to compete for available funds based on their own need and intended use of the money. Some peer-to-peer lending platforms do require credit checks, though, and some charge very high interest rates to borrowers with poor previous performance. In addition, peer-to-peer loans must be repaid, as many of the services employ professional collection agencies to pursue unpaid loans, and defaults are routinely reported to credit reporting agencies.
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