September 9th, 2013
The Alternative Credit Spectrum
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**Today’s guest post is contributed by Joe.**
Having a poor credit score can sometimes feel like being trapped in quicksand– the harder you try to escape, the further high interest rates and punitive charges pull you back down. But everyone needs access to credit and if you do need funding, there are always alternatives. The terms may not be pretty or available to everyone, but below are some options that may improve your credit health, or help fund you until you can.
Bad Credit Loans
Companies will offer loans or credit cards to people with bad credit scores, but will typically make you suffer for it. Interest rates for consumers with bad credit start at double the best offers from as little as 12-15%, but can rise up to 200-300% APR for loans lasting less than a year. It’s also important to bear in mind each application for a loan can lower your credit score by up to 5 points, so always try to use online eligibility checkers or other information to determine if it’s really worth your effort. However, if you are in a position to make repayments in full every month and stay within your limits, you can slowly begin to rebuild that tarnished credit history.
Peer to Peer and Micro Loans
In the last several years, new smaller lenders like Zopa, Funding Circle, and Accion have entered the market place, looking to help individuals with small peer to peer or micro loans. They offer greater flexibility by considering more factors than simply your credit score. Each peer-to-peer loan is spread out amongst a large number of individuals, therefore spreading the risk for the lenders and increasing your chances of getting a loan. Micro loans companies like Accion exist to finance and nurture small business; they will consider character and business acumen as well as credit history and offers loans from as little as $200. By reducing the risk for lenders or offering smaller loans, micro and peer to peer lenders can offer finance to a greater range of people, i.e. those shut out by traditional lenders.
Personal Asset Lenders
One way to avoid being weighed down by your credit history is to use collateral loans. The risk is considered purely against the value of the asset you use to secure the loan, so your credit history is irrelevant. New companies like Pawntique and borro lend against a huge variety of items, such as cars, antiques, gold, and even wine collections. The two drawbacks of collateral loans are that you need a valuable asset in the first place and that they won’t help you improve your credit health. But if all the other options are unappealing and you need financing without getting caught in the bad credit score spiral, they are a viable option. It’s also important to note that these loans are short term solutions. Rates will be higher (working out to around 80% APR) but usually also allow the flexibility of early repayment.
Friends and family are frequent sources of loans for entrepreneurs. Over half of small businesses get financed this way, but there is always the risk that personal relationships will be affected when money becomes involved. You may also be able to apply for subsidized business grants or loans if your business is in the right sector. Check out the Small Business Administration website for more information.
Bottom Line: No matter how difficult the situation may seem, there are always alternatives and ways for improving your credit health.
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