Bad credit can prove to be a major hindrance in the path of seeking financial assistance even long after its cause has been addressed and resolved. Most lenders tend to pay greater attention to a financial mistake committed by the loan seekers previously rather than their current financial situation and need. Thankfully, for such borrowers, bad credit loans can help them get the required monetary assistance to overcome their present financial hardship. However, in order to exploit their full benefits, it is important for the borrowers to have a better understanding about the various aspects of these loans for people with bad credit.
What is Bad Credit?
When deciding about whether or not approve the loan of an applicant, most lending institutions pay significant attention to the creditworthiness of the borrowers. This essentially entails analyzing the ability of the prospective to repay their debts. This analysis is done on the basis of the credit score of the borrowers, which in turn is calculated on the basis of a variety of factors.
A low credit score amounts to bad credit and results in making the lenders mistrust the borrower’s ability to repay the loan. There are several reasons that might result in an individual having a bad credit history leading them to check out the payday loans no credit check options. However, before learning about these reasons, it is first important to gain information about the factors that affect the credit score.
Factors Considered for Credit Score Calculation
As mentioned before, credit score is calculated on the basis of a variety of factors that determine the likelihood of an individual to pay back the loan amount. These include the following.
Payment History: The entire payment history of the prospective borrowers is checked to determine their have fully paid back their other loans and within the stipulated time. This factor amounts to 35% of the overall credit score.
Types of Loans: The lenders also like to gain information about the types of loans that the borrowers might have taken previously. In general, individuals, carrying lot of debt and with frequent applications for instant loans for bad credit are considered to be extremely risky in terms of their repayment capacity. This factor amounts for 30% of the overall credit score.
Length of Credit History: Individual with a long and well managed borrowing history are considered are generally granted a higher credit score. This is because such individuals are believed to have a better experience in terms of managing their finances in such a manner that makes debt repayment relatively easy. This factor amounts to 15% of the overall credit score.
Type of Credit Used: This factor considers the actual type of credit sought by the borrowers on previous occasions. Hence, individuals seeking loans that are more in accordance with the standard lending guidelines are likely to have a better credit score than those who constantly seek loans for people with bad credit. This factor contributes 10% to the overall credit score of an individual.
New Credit: People, who tend to apply for several new loans within a short span of time, are generally considered to be potentially risky by the lenders. Such people are generally accorded a low credit score and hence least likely to be the most valid customers for a regular loan. This factor accounts for the remaining 10% of the overall credit score.
Reasons That Can Lead To Bad Credit History
Having learnt about the factors that contribute towards the calculation of credit score of an individual, it is essential to understand the reasons that might lead to a bad credit history. Even though there are not many reasons for bad credit, their presence or absence can deeply influence the ability of an individual to obtain a regular loan for personal or even business use. These reasons are listed as follows.
- Inability of an individual in repaying an instalment to the lender on time.
- Repeated rejection of loan application of a prospective borrower irrespective of the reason
- The complete absence of a credit history due to the borrower never having taken a loan previously.
- Some lenders might also consider the tendency of the potential borrowers to repeatedly opt for bad credit loans.
Finding a Suitable Alternate
While, the need for the borrowers to improve their credit score cannot be undermined, overcoming their current financial emergency requires them to look at a suitable alternative. In this respect, loans with no credit check are generally a preferred choice for most borrowers. These loans are similar to personal loans but are offered for a small period of time and a significantly lesser amount. When managed and repaid well in time, instant loans for bad credits can not only help the borrowers to overcome their financial crux but also improve their credit score. In fact, a large number of people with bad credit scores have used these loans to improve their creditworthiness for the leading lenders.