Personal Unsecured Loan Options
For Bad Credit Borrowers

presented by Mory Brenner, Esq.




        Finding an unsecured loan of any kind with bad credit represents a significant challenge. Finding an unsecured personal loan with bad credit and terms that might appear even mildly consumer friendly looms as an even greater task. In this article we examine the definition of an unsecured personal loan, what to avoid, and what to reasonably expect.


        First let us go over what constitutes an unsecured loan. To keep things simple, an unsecured loan would include any lending of money where the only thing the lender gets to insure they will have the loan repaid includes the borrowers personal promise and good name. Contrast an unsecured loan with a secured loan such as an auto loan, where the lender may repossess the car if the borrower fails to make payments or a home mortgage where a house foreclosure takes place in the case of a default. For more on secured vs. unsecured loans and assets I have written a special FAQ. Why does any of this matter? When a lender looks at someone who already comes to the table with bad credit they must give serious consideration to the possibility that they might have trouble getting paid on the new loan as well. What would make them want to make such a risky loan? With a car loan or a mortgage the lender can reassure themselves that if things turn sour they still stand to not lose money because the value of the collateral for the loan, say the house or the car, would fetch so much cash on sale that the loan could be paid in full. Unsecured loans offer no such alternative in the event of default. The lender therefore needs incentive to make an unsecured loan, this comes in the form of a high interest rate. The lender want to minimize risk as well, so even at a high rate the sums available for lending may remain small. For those with bad credit even less. At some point the lenders may draw a line, and set limits like maximum loan levels. In other cases the government may set limits, such as maximum interest rates. At the end of the day the consumer may or may not have options to take an unsecured personal loan depending on how much they need to borrow and how bad their credit has become.

        Imagine a typical situation where an unsecured loan with bad credit works. A person finds himself or herself with some debt trouble that has already caused a poor credit score to exist. You should read about exactly what is bad credit but for this article we will assume the applicant indeed has bad credit. Figure they have $4000 in debt on 7 accounts and credit cards. They have good income and a steady job but moving those 7 payments into one would really help to get their finances in order. This person may be a good candidate to take an unsecured loan even with bad credit. First they are not asking for too much. Unsecured loans with bad credit for homeowners may top out at $10,000 to $25,000. For renters limits range from $5,000 to $15,000. Unsecured loans higher than this range would require good to excellent credit. Note they have a steady job. Bad Credit is bad enough, bad credit and no job will likely exclude you from any type of unsecured loan. Sometimes lenders may look to what the money will be used for. Reducing debt helps your overall financial situation. Equipment to start a business will hopefully generate income. Contrast these with wanting money for a vacation where your finances will not be helped and your assets have not been added to either. Buying a big screen TV might not be looked on as a favorite by a lender but at least they would know if you got in trouble you had something to sell. From the consumer side note the person's debt remains too low for most debt settlement companies or credit counseling companies to offer them help. Let's assume that while the rates on an unsecured personal loan with bad credit might be very high, that the rates on their credit card came in at the same or higher rates. For an unsecured personal loan to work it should be a fair and desirable deal for both the lender and the borrower.

        Need emergency money? Put yourself in the shoes of someone who lost their job. The mortgage fell $15,000 behind and foreclosure looms just over the horizon. You researched how to stop home foreclosure and decided an unsecured personal loan would be best if you could get one. With most unsecured personal loans the whole process takes a few hours to just a few days, so the timimg looks fine. Recently you took a new position at a higher salary than you had before. The bank offered a deal to take $5,000 now and put the rest of the arrears on the principal balance and allow you to pay it over the life of the loan. You have examined all of the options for how to get money when need money and determined that an unsecured personal represents the best option. With the new job you figure that you can easily make payments on both the mortgage and the personal loan. The interest rate may be high but looking at the payments over the entire personal loan the outlay represents far less than the legal fees alone would cost were the foreclsoure to proceed. While unsecured personal loans should not be used for all circumstances, when compared to the alternative of foreclosure an unsecured personal loan clearly appears as the better option.

        Examine the case of a person behind on their rent, utilities, car payment and credit card bills. They have a good steady job and a $7000 unsecured personal loan would catch them up with everything and put them back on track. They look at their income and expenses and feel the payment should be a piece of cake. Even figure they don't even have bad credit yet. That personal unsecured loan sounds like just the thing needed. It may be, but just hold on a minute! If the loan payments look so easy what explains the landlord and other creditors banging on the door? Too many time people get in debt without understanding exactly what got them there in the first place, then they deal this the immediate debt problem and not the underlying issues. Before taking any type of debt consolidation loan know the facts about how you fell into debt and make the corrections needed to prevent debt from reoccurring. I encourage people to use our interactive personal budget analyzer that forces you to examine where all of your money gets spent, it even knows when you have not accounted for all expenses. Not truly understanding cash outflow stands as a primary reason people end up in serious debt trouble like bankruptcy filing. You may think you understand where all of your money goes, but in fact, most people don't really know. With income and spending issues understood and corrected, the time arrives for dealing with the debt either with an unsecured personal loan, a debt settlement, a bankruptcy or whatever fits your financial situation.

        I could tell you that finding someone to make a personal unsecured loan to a borrower with bad credit ranks as an easy task because you can apply for one right here, but in reality only a handful of firms make such loans. So while you might apply here, and that part is easy, if you get turned down it's not like a gas station where another awaits just around the next corner. If you want more than the $5,000-$15,000 maximum that most companies will use as a cap for a personal loan to someone with bad credit, you have to improve your credit or come up with a way to offer security, like pledging your home as collateral. If you need a low interest rate you may find no one offering such a rate without security and better credit.

        Let's figure for a moment that you decide an unsecured personal loan sounds like just what you need to solve your problems. What can you really expect to get if you apply for an unsecured personal loan with bad credit? The answer depends on the details of your loan request. Look at two applicants: Number 1 had great credit up until two years ago when a nasty divorce forced her to file bankruptcy. Since the bankruptcy filing she had paid her bills on time but had not really built her credit score up to much. Number 2 saw financial trouble 6 years ago and got back on track, then 2 years ago ran into more money problems and mostly got straightened out and now needs a loan to get out from under debt again. Candidate 1 might look like a better unsecured loan applicant. Even though she had a semi-recent bankruptcy, she had a history of good payments on obligations before and after the period of bad credit. Even though a bankruptcy turns your credit about as bad as it can get, an issuer of unsecured loans would note the history before and after the bankruptcy as well as the fact that the bankruptcy happened because of a one time explainable event. In the case of applicant 2 it looks like a repeateed pattern of payment and budgeting trouble, so even though applicant 2's credit score might be higher than the person who filed bankruptcy, they might be less likely to be approved for an unsecured personal loan.

        The most important factor in decision making on unsecured personal loans with bad credit revolves around the ability of the applicant to repay the loan. You need steady income and enough available cash beyond your expenses to prove you can make the payments on the loan you apply for. Remember, unsecured personal loans for people with bad credit do not come cheap. At an interest rate of 23%, for example, $1000 borrowed for two years would cost $52.37 per month. While that may not sound like too much remember that over the life of the personal loan you will pay back $1256.88 for the $1000 that you borrowed. For $2000 double that, triple it for $3000 and so on.
Use this payment calulator to figure your own estimated loan payment (don't worry that it says mortgage payment calculator, the math is the same). How much you can pay back plays into how large of an unsecured loan you might get, but limits come into play too. Most unsecured personal loans to people with bad credit will range from $2000 to $5000. Larger loans may be available with more restrictive criteria and once you drop below $1000 to $2000 you may find loan companies do not offer loan terms like a year or longer for repayment. Standard schedules to repay unsecured loans with bad credit run from one to three years, maybe five years in special cases. If you need a larger loan you may quailfy for a loan of less than you origianlly asked for, take that and make payments on time, in a few months you might ask for a bigger loan and with the evidence of your good payment history on the first one you get the rest of the money you needed.

        Other loans or financial transactions might fall under the heading of an unsecured personal loan for someone with bad credit. To fully discuss that topic I shall address them and warn you about them here. PayDay loans technically qualify as personal unsecured loans and they can be obtained with bad credit too. The consumer needs to realize that as bad as inerest rates on standard unsecured loans may get, up into the 20% per year range, PayDay loans can reach 400% or more. The only case I ever saw where I suggested a PayDay loan went like this: A person needed to make a mortgage payment on Monday, if they made the payment their house would not go to forelcosure and they had an arrangement with the bank to catch up on the rest of the arrearage. If they missed the payment the bank was going to void the deal to catch up, start the foreclosure, and bill the customer for legal fees of $4000. The person had a pay check coming on Thursday so they could pay back the payday loan and never use one again. Note the keys points, a one time PayDay loan, no need for and extension or roll over, and a financial consequence of great purportions as an alternative. Most people who take PayDay loans use them as standard unsecured personal loans because few alternatives exist for people with bad credit, but rolling and extending PayDay loans just dig people deeper in debt most of the time. Also in this category one might find loan sharks. If you find yourself even looking at PayDay loans or loan sharks the time has come to look into credit counseling, debt settlement or bankruptcy.

        In a way credit cards operate like personal unsecured loans too. Depending on what you needed the money for and how much you wanted a credit card might provide an option too. Bad credit might keep your credit limit low or even restrict you to a secured credit card, but an unsecured credit card might even be a better option for people who originally began looking for an unsecured personal loan. I have a whole article on bad credit credit cards as a part of this series.

         Don't be too upset if you fail at obtaining an unsecured personal loan with bad credit. Take rejection as a sign that perhaps you need to review your budget and spending habits or boost your poor credit first. Personal bad credit loans can help but they might lead you right to worse trouble as well. Learn everything you can about your own situation and be honest with yourself. Look at all options carefully and choose your next step wisely.

For more information on borrowing money with bad credit visit:
Click here to begin your introduction to lending for borrowers with bad credit. Click here for information and guidance on obtaining a home loan despite having damaged credit, history of bankruptcy, or other unusual loan issues. Click here for information and guidance on credit card companies who lend to people with bad credit. Click here for information and guidance on obtaining a car loan despite having damaged credit, history of bankruptcy, or other unusual loan issues.


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Debt Consolidation / Debt Settlement Program - Consolidate your credit card and unsecured personal debt with a program to settle balances for 30-50 cents on the dollar. Make monthly payments toward the total settlement over a period of years. Free initial consultation. Learn more and see if your situation fits the program online.

A Guide to Borrowing Money with Bad Credit - Including informational articles on obtaining a home mortgage, auto loan, credit card or unsecured personal loan.

Credit Cards For People With Bad Credit - Read either informational articles on obtaining any type of bank card or credit card with bad credit, including a definition of what is bad credit or look at a complete set of FAQs dealing secured credit cards.

Credit Repair and Credit Rebuilding -Credit repair and credit rebuilding article. Topics include how to repair your credit and warnings about credit repair scams. Links to other credit repair sites and professional credit repair services plus my own Free Guide to Help Repair and Rebuild your Credit Report. For more credit help try 14 Do's and Don'ts To Raise A Score Fast or the Credit Score FAQ.

Who to pay when you can't pay everyone - An article addressing cash allocation for debtors.

How to Get money when you need money - Examines WHEN you really NEED money and how to get money even with bad credit for an emegency or financial crisis.

Stop Home Foreclosure Help - Articles to better understand the foreclsoure process and how to avoid a foreclosure including an interactive tool to analyze your own situation and point you in the right direction to keep your home, a list of various ways to halt a foreclosure, a list of 10 mistakes to avoid when facing foreclosure and foreclosure myths.

Personal Home Budget Analysis - An interactive tool to learn where your money REALLY goes. Input your income and expenses, the program will automatically determine if you have accounted for all you have spent. When you have discovered all your expenses you will be know the details of any overspending. Use this information to help plan and keep a monthly budget or change spending to avoid further debt or bankruptcy.

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Nothing contained herein should be construed to constitute advice for your personal circumstances. This is intended as a peripheral exposure to the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws or their alternatives. Whether or not you should file a Chapter 7 bankruptcy, Chapter 13 bankruptcy, or any bankruptcy, will vary depending on your personal circumstances and should only be undertaken after careful consideration, analysis and after consultation with an attorney experienced with such matters. These pages may contain information and rules peculiar to the Commonwealth of Massachusetts.

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The most recent update of this page occurred on 01/07/10.