Alternative loans for fair credit borrowers
A fair credit personal loan can be an easy way to finance expenses like a wedding or a home improvement project. But they are not always the right choice. Those with less than excellent credit score may be able to find a different product that fits your budget.
Credit cards, lines of credit, and other financing can help you improve your credit score with a positive payment history. They also offer more flexible financing requirements than some loans, making them a good alternative if you don't need or can't qualify for a personal loan.
What qualifies for fair credit?
The FICO scoring system is the most widely used system by banks, online lenders, and credit card companies. It divides grades into categories, with fair credit being the next lowest level.
Uncommon: 800-850
Very good: 740-799
Good: 670-739
Just: 580-669
Poor: 300-579
Fair credit is any score between 580 and 669. Lenders with fair credit generally have higher rates than borrowers with good credit and are less likely to be approved for a loan.
Fortunately, if a traditional personal loan isn't the best route for you, there are still a number of financing options available. With a positive payment history, many can help improve your credit score, which may give you access to better rates in the future.
Peer-to-peer loans
Unlike traditional personal loans, peer-to-peer (P2P) lending connects borrowers with investors. These investors can be individuals, a large corporation, or a combination of both. For this reason, the eligibility criteria are often less stringent than for a personal loan funded by a single lender.
However, rates can also be higher and it takes longer to fund P2P loans. P2P lenders also charge high fees - sometimes as high as 8 to 10 percent of the loan amount.
Benefits
Less stringent standards than traditional personal loans.
Fair credit is often accepted.
Drawbacks
High setup fee - sometimes as high as 10%.
The Annual Percentage Rate (APR) is higher than most lenders and financial institutions.
Federal credit union loans
If you have fair credit, looking into a federal credit union may be a good option. Because credit unions are member-owned, they can make loans to borrowers who may be considered "too risky" because of poor credit or low scores.
In addition, the maximum annual interest rate for credit union loans is 18 percent, which means you'll pay less interest over the life of the loan. Lenders who cater to those on the credit spectrum can charge rates as high as 32 percent.
The main drawback is that you must be a member of a credit union to be eligible. Although it is easy to meet the membership requirements, in many cases you will need to open an account with a small amount during the application process.
Keep in mind that having an account and being a member of a credit union is not the key to getting approved for a loan, and you may be denied if you do not match the qualifying requirements.
Benefits
The maximum annual interest rate is 18%.
A range of different banking services are provided.
Drawbacks
You must have an open account or be a member.
Membership may be limited to certain groups.
Credit card
Credit cards can be a good way to build your credit score and increase your ability to borrow - if you're willing to pay. There are many fair credit credit cards available, although they may have competitive rates and lower fees than similar cards for borrowers with good and excellent credit.
However, it is worth looking at as an alternative to a personal loan. Instead of covering your expenses, you can manage your daily expenses and pay your card in full at the end of each billing cycle. This will help you avoid fees, build your credit score, and qualify for better cards and loans in the future.
Benefits
Membership benefits such as cash back on purchases and the ability to check your credit score for free.
Regular reporting to the credit bureaus helps improve your score.
Drawbacks
High interest rates and fees.
There are not a lot of options for getting fair credit.
Home equity loans and lines of credit
A home equity loan or home equity line of credit (HELOC) uses your home equity -- the market value of your home for the amount you paid -- as collateral. Because of this, you may be able to get a more competitive interest rate because lenders take less risk with a subsidized loan.
However, if you default on the balance, your home can be repossessed to cover the late payments.
Despite these risks, home equity loans and HELOC loans are a good option if you don't have access to the money you need for major expenses, such as education costs or major renovations. Also, since they have lower interest rates than personal loans, they can be less expensive in the long run if managed properly.
Benefits
Access to up to 85% of the property value.
Low interest rates because the loan is secured by collateral.
Drawbacks
Default can lead to foreclosure.
There must be a great deal of fairness in the house to qualify.
Lines of credit
Lines of credit are like credit cards for borrowers with fair credit. You'll have a line of credit—usually a few thousand dollars—that you can draw on when needed. You'll only pay interest on the money you use, and when you pay, you can access that financing again, making it ideal for long-term projects, expenses, or renovations.
Lines of credit have lower fees and lower interest rates than credit cards and, unlike personal loans, are more flexible over the long term.
However, it does not come with the rewards that most credit cards offer, which can be a downside but makes it a less expensive option.
Although they may be more suitable than other forms of financing for more expensive endeavors, lines of credit are not as popular as personal loans and this might make it more difficult to identify the ideal choice for your needs.
Benefits
Lower rates than credit cards.
Flexible financing for various expenses.
Drawbacks
It is not as popular as personal loans or credit cards.
Bail may be required.
When should you avoid financing all together
Loans and credit cards can be convenient, but they often come with higher interest rates when you have poor credit or a poor credit history. If you already have a lot of debt or you don't have a stable source of income, it's best to go for alternatives.
Rewriting your budget to adjust for planned spending or increase savings will benefit you in the long run. This may mean waiting longer to cover expenses, but you'll spend less money overall.
Loan alternatives
If you need to cover an urgent expense or are having trouble managing your existing debt, there are less common options available to borrowers in similar situations.
When evaluating your options, it is important to thoroughly research each option to ensure that you are putting yourself in an advantageous position. However, it is important not to stop or delay the process to reduce the accrual of additional benefits.
Negotiate with creditors or consider debt relief options. It's not the most pleasant task, but if you're having difficulties, lenders may be willing to work with you on a reasonable payment plan. You can also work with a debt relief company who, for a fee, will act as a mediator with your creditors to help reduce or eliminate your debt.
Nonprofit Organizations There are national and local nonprofit and religious groups that can help you if you are facing a financial crisis.
Salary increase. Your employer—especially if you work for a large company—may be willing to offer you an advance on your next paycheck. However, be careful with this route; Although this may help pay off a sudden bill or expense, you'll have less money on your next payday.
Bottom Line
A personal loan may be a popular financing solution, but it is not the only one. Research your options to find the most cost-effective one. Ultimately, fair credit won't stop you from getting a loan — all you have to do is be aware of the costs associated with a personal loan, credit card, or alternative.
