Round out your mix of accounts with a best personal loan for bad credit. This type of account can increase your credit score 50+ points.
Variety is the spice of life, and this is certainly true when it comes to the credit bureau formula. They call it your mix of accounts, and it makes up 10% of your credit score. Most people already have a few credit cards in their wallet, which is one type of credit account. Add an installment loan to the mix, and you can boost your score by another 50+ points. Typical installment loans include car loans, personal loans, debt consolidation loans and mortgage loans.
Benefits of a personal loan
You get short-term and long-term benefits from a personal loan with installment payments, compared to an open line like a credit card.
Short-term, you save money on interest charges when you pay down a high-rate credit card with a low-rate personal loan, like a debt consolidation loan. Long-term, you can get an extra 50+ points on your credit score. It might not sound like a big deal, but those extra points can nudge your score over the line from poor up to fair.
The real long-term benefit comes when you leverage your new and improved credit rating to negotiate better terms on all your loans and credit cards.
Our top picks
One of my favorite new lenders is Avant. They approve applications with scores as low as 580, and they use a soft enquiry to check your eligibility. This type of credit enquiry is not reported to the credit bureau unless you accept an offer and open an account. The loan amount ranges from $2,000 to $35,000. The interest rate ranges from 9.95% to 35.99%. And you can choose a loan term of 24 to 60 months. One thing we wish they would change is the 4.75% administrative fee. For example, Avant would deduct $95 from a $2,000 loan so you would only receive $1,905.
Another good option is Lending Point. The minimum credit score is 585, and they approve applications with a bankruptcy when it is more than a year old. They use a soft enquiry to check your eligibility, so it is not reported to the credit bureau unless you accept an offer and open an account. The loan amount ranges from $2,000 to $25,000. The interest rate ranges from 9.99% to 35.99%. And you can choose a loan term of 24 to 60 months. One thing we wish they would change is the up to 6% origination fee. For example, Lending Point could deduct anywhere from $0 to $120 from a $2,000 loan. You might receive the full $2,000, or you might only receive $1,880.
We like the fact that Bankrate.com gives high marks to both lenders. Avant received a 4.4 star rating and Lending Point received a 4.5 star rating. These are very strong ratings for a financial services product.
We also like the fact that both lenders offer easy online applications with instant decisions, using a soft enquiry process. Plus, both lenders transfer funds to your account within 1-2 business days after an application is approved.
Clearinghouse for online lenders
Another option when you’re looking for a personal loan is an online lender clearinghouse like Lending Tree or Bankrate.
These groups are not direct lenders. They provide a marketplace where many lenders post their offers in one place. When you visit the website you can search for different types of loans like personal loans, home loans, credit cards and even insurance. Plus, you can sort the offers for different levels of credit.
One of the things we like best about Bankrate is the comparison chart where they list their top-5 picks for lenders who cater to applications with low credit. The chart includes a side-by-side comparison for interest rate, length of repayment term, and maximum loan amount. You can make your choice and click to complete an application.
One of the things we like best about Lending Tree is the bidding process where lenders compete for your business. You answer a few questions, and they send your information out to their network of lenders. Most consumers receive 3-5 offers from different lenders around the US.
How to evaluate a personal loan offer
When you are considering a personal loan it’s important to understand all the costs before you accept the bank’s loan offer.
One of the first things to look for is the soft enquiry mentioned above. It’s a sign that the bank is already working with you to avoid hard enquiries on your credit bureau file.
I advise my clients to assume the bank’s advertising messages provide an overview on the loan, not every single detail. You’ll need to review the term sheet that comes with the offer letter to get all the details. The offer letter and term sheet will be sent to you after the bank approves your loan application. Review these materials carefully before you accept the loan. Double-check the interest rate, origination fees, administrative fees and any other miscellaneous fees. Look to see if the APR (annual percentage rate) is higher than the interest rate that was advertised online. The APR is the effective rate. It can be higher than the interest rate, because it includes all the fees. The APR is the real cost of the loan stated as a percentage.
In order to understand the real dollars-and-cents cost of the loan, you’ll need to get out your calculator. Compare what you’ll pay in total financing charges for a personal loan vs. your high-interest rate credit cards.
One advantage of an installment loan is that the bank puts you on a pre-determined schedule. You pay the same amount each month, or equal installments for 24 or 48 months. Which means the personal loan will be gone at the end of the payment schedule. On the other hand your credit cards could stretch out for many more years when you send just the minimum amount due each month.
Conclusion
What’s the best loan for bad credit?
And why do you need another loan when you’re trying to improve your credit? The credit bureau formula includes what they call mix of accounts, and this category makes up 10% of your credit score. You probably already have a few credit cards in your wallet. When you add an installment loan to the mix, you can boost your score by another 50+ points. Typical installment loans include car loans, personal loans, debt consolidation loans and mortgage loans.