When you apply for most types of financing, lenders will decide whether or not to lend you money based on your credit score.
If you have weak or no credit history, you will struggle to qualify for normal loans.
Fortunately, there is a market for people with this problem. With poor credit financing, you have some options to borrow money despite your poor credit score.
What is poor credit financing?
Poor credit financing is financing for people with weak credit scores, typically a score of 680 or lower.
Lenders offer loans specifically for this group. This can include financing like car loans, small business loans and credit cards.
However, there is rarely poor credit financing for mortgage loans. It costs so much to buy a home that lenders are not willing to risk making these loans to someone with a weak credit score.
What are the advantages?
The primary advantage of poor credit financing is it allows people with weak credit to still get loans. Otherwise, this group would not be able to borrow money to buy a car or start a business.
Poor credit financing also helps build your credit score.
Eventually, it will become strong enough that you will be able to qualify for normal loans and will not need to turn to poor credit financing anymore.
“If you make your payments on time,
your credit score will keep going up.”
What are the disadvantages?
The problem with poor credit financing is it is relatively expensive. Since lenders are taking on more of a risk by lending to this market, they charge a higher interest rate as compensation.
Expect to pay more for this financing than you would if you had qualified for a normal loan.
Another issue with poor credit financing is these loans typically require larger than normal down payments. You may need to pay more upfront to buy a car or have more collateral to qualify for a business loan when you turn to poor credit financing.
Refinance later on.
If you are smart with your poor credit loans, you will not have to rely on them for too long. Make your payments on time each month and watch your score go up.
Once you reach a score of 700 or higher, you can consider refinancing your poor credit loan. This would replace your higher interest rate loan with a more affordable one. You can now avoid paying too much for your financing.
Do not let your weak credit score prevent you from getting a loan. With poor credit financing, you can still get the money you need while also improving your credit score.