If you have a bad credit score, you likely know how difficult it is to get access to the financing that you need. With a bad credit score, lenders are much more likely to deny your loan application or charge ridiculously high interest. Thankfully, 2nd chance lenders can give people with poor credit scores access to money they need.
Your credit is one of the most important aspects of your personal finances. Your credit, mainly your credit score and your credit history, have a huge impact on many things including whether or not you can get a loan or credit card. Because of this, it is something that should always be worried about and anyone with a credit score should always be trying to improve it.
However, the importance of your credit is something that is swept under the carpet in terms of education. Many students in both high school and college fail to ever learn the importance of your credit and how it can help or hurt your financial state down the road. When these students grow up and get into the real world, they are oftentimes unaware of the importance of credit scores or what affects them. As a result, they might get a poor credit score and not realize something must be done about it until they have already dug themselves a huge hole.
Even worse, building credit and improving your credit score is a huge catch 22. Getting debt like loans and credit cards and paying it off is essential to building your credit. However, you need a good credit score to get most loans and credit cards. Further, of the few lenders that lend to people with poor credit scores, a very small portion of these improve your credit score if you pay the debt back. If you have a bad credit score you oftentimes can’t even get the debt you need to improve your credit score! See the issue? It’s like needing restaurant experience to work at a restaurant. If you have no experience, how are you supposed to get restaurant experience if you need experience to even get a job?!
Thankfully, there are some lenders that can offer you a way out of this chaos. These lenders are called 2nd chance loan lenders. They are often referred to as 2nd chance payday loan lenders, yet payday loans are not the only 2nd chance loans. Essentially, these lenders offer borrowers with poor credit scores access to debt that will help build them credit if they pay it back successfully. While these second chance payday loans have their downsides and risks, it may be your only option if you have a weak credit score but still need money.
Let’s take a deeper dive into some of the details of 2nd chance loans.
In the past, some of the only money you could have access to with a bad credit score were payday loans. With these traditional loans, you had to go to brick-and-mortar stores and jump through various hoops to ever get access to your money. Today, with advancements in technology and a growing number of direct lender options offering their products digitally, there are many more options available than just payday loans from brick and mortar stores. However, you now have to filter through tons of different apps and financial products that companies want you to use. Because of this, it’s important to be informed about the various types of 2nd chance debt. Let’s look at some of the most common forms of 2nd chance debt.
While more forms of 2nd chance debt have been introduced over time, 2nd chance payday loans are likely still the most widely used.
A payday loan is a loan that is paid back within a week or two of receiving the loan, or on the borrower’s next ‘payday’, hence the name. These loans are often no more than $500 and can be for as little as $25 or so. Since these loans are some of the only loans accessible to people with poor credit scores, many people tend to default on these loans. As such, the payday lenders charge very high interest to recoup some of their losses. The high interest rates along with short repayment periods can make paying these loans off very difficult.
If you get a 2nd chance payday loan and pay it back successfully without any late payments or defaults, your credit score will benefit as a result. However, since these loans are fairly small and are very short, do not expect your credit score to raise 200 points overnight.
While getting small payday loans might seem like an easy way to build credit, it is important to know the facts about the payday loan industry. Payday loans are a part of an industry that is known to be particularly predatory to their borrowers. In other words, they have been busted for preying on their customers by pushing them further into debt.
By pushing their customers into debt, the lenders force the borrowers to get even more of their loans to help pay the debt. This keeps the customers into something called a payday loan trap which can financially ruin someone. Many payday loan lenders have been caught doing this and as a result, payday lenders have been outright banned in some states like New York.
While 2nd chance payday loans can be helpful to build credit, it is important to understand the risk that comes with them.
Installment loans are the most common type of loans. Loans like mortgages, auto loans, and personal loans are often installment loans. Since there are such a wide variety of installment loans, there are very few that are 2nd chance installment loans. However, they still exist.
An installment loan is a loan that is paid back in a series of payments, oftentimes of equal amounts. These installments can be on the basis of weekly, monthly, quarterly, or yearly payments depending on the terms of the personal loan. The installment payments that are made consist of principal as well as interest. For example, if you got a $1,000 loan that was to be paid back in weekly installments over the course of a month, you would likely make a payment of $250 plus interest every week for four weeks. After four weeks of $250 payments, the original $1,000 loan amount would be paid off and your loan would be done.
Because of the longer repayment term and smaller payments, installment loans are almost always easier to pay off than payday loans. Instead of getting a payday loan and having to turn right around and pay the money back in a week or two, an installment loan would allow you to make smaller payments over the course of a few weeks or months.
On the flip side, installment loans mean that you have debt hanging over your head longer than a payday loan. Further, installment loans might end up being slightly more expensive than payday loans since you are paying them off for a longer period of time. 2nd chance installment loans are also much harder to find than a typical 2nd chance payday loan.
A secured credit card is not a loan, but it is still a form of debt that can give you a 2nd chance if you want to build your credit score up.
A secured credit card is a credit card that requires the user to put up collateral for the credit card. For secured debt like secured loans or secured credit cards, if the borrower fails to pay back their loan or credit card, the lender has full legal rights to seize whatever the borrower put up for collateral.
This makes a secured loan or credit card riskier for the borrower but makes it less risky for the lender. Since secured debt is less risky for lenders, they are more willing to allow borrowers with bad credit scores to have access to it. This can serve as a 2nd chance for you if you have a bad credit score.
Getting a secured credit card and consistently making a monthly payment on it will build credit history over time. This will in turn boost your credit score. However, note that you need to keep your credit utilization ratio under 30%. This means that you only use 30% of your credit limit every month. If you use more than 30%, it can actually hurt your credit score.
We’ve already gone over what 2nd chance loans are as well as some of the types of 2nd chance loans, so let’s now dive into some of the pros and cons of a second chance loan so you can further know if they are right for you!
Here at Possible Finance, we understand the catch 22 of building credit. Time and time again, we have not only heard stories of people not being able to have access to money but we have equally heard countless stories of people being harmed by the payday loan industry. We wanted to fundamentally combat this injustice and offer a 2nd chance loan, like online payday loans and installment loans, that offers the best aspects of 2nd chance loans without the negatives.
We do not run a credit check when applying for a loan, which means you can get a loan approval no matter what your credit score is. If you successfully pay back our loan, we report your payments to Experian and TransUnion which builds your credit history over time. Our 2nd chance loans are also installment loans, which makes paying the loans back much easier. If you are struggling to pay back our loan, you can extend your payment up to 29 days right within the app.
Think you want to get a 2nd chance loan with Possible? Download our app today and get started!