Late student loans, foreclosures, high credit card balances, mounting utility bills, and collection accounts, among other unmet financial obligations, are the perfect recipe for bad credit. Falling behind in your debt or bill payments is bad for your credit score, as it places you among high-risk borrowers that lenders try to avoid at all costs. Accessing credit is part of your financial power, as it allows you to purchase things that you need at the moment and pay for them at a later time. Getting approved for basic credit products is determined by your likeliness to pay your loans promptly.
Fortunately, bad credit can be repaired, and all this takes is financial discipline and patience. Credit repair is the process of fixing a poor credit report that might have been caused by a number of different things. A credit repair loan is a common credit repair strategy used to clean up bad credit reports and build a solid credit score. This strategy involves committing to pay a certain amount of money monthly to a credit repair organization towards a small loan to establish a superb credit history. Read on to learn more about credit repair loans and how they work.
How Does a Credit Repair Loan Work?
One proven way of improving your credit score is by paying your debts on time. The goal of a credit repair loan is to establish clean payment records. These records are timely payments that can help create an impressive loan repayment history, which lenders often consider when processing your loan application. The credit repair loan helps build your credit history and simultaneously ensures that lenders will have confidence in you.
Upon creating an account with a credit building agency, the firm advances you a small, interest-free loan, one that you can comfortably make payments for over an agreed-upon period. The funds are placed in a suspense account where they are put on hold while you continue to make monthly payments towards the repayment of the loan. After you’ve completed making the payments, the agency takes its cut from the amount you just contributed and shares the records of the loan with a credit reporting agency. These repayment records are then factored in when the credit reporting agency calculates your new credit score.
The interest-free loan is treated like any other loan, and this is why your repayment history will be included during the next review of your credit score. Sometimes, the process of credit repair can be as easy as removing negative entries from your credit report. Credit repair organizations can advise their clients to dispute wrong negative records on their credit reports. By removing negative records that weigh down your credit score from your report, your credit score will automatically soar.
Where to Get a Credit Repair Loan and What to Consider
Your credit score is an important metric used by lenders, vendors, and creditors to determine how likely you are to make your loan repayments on time. It can mean the difference between obtaining that much-needed funding and not obtaining it. This is why it is important to always keep your score high for whenever you might need to apply for a loan.
Don’t worry if you have a bad credit history—it can be corrected. As mentioned earlier, credit repair loans, if executed properly, can help you improve your score. Below are the different institutions that can give you credit repair loans to fix your credit history and consequently improve your score.
Some banks offer credit repair loans popularly referred to as second chance loans. These are loans designed for individuals with low credit levels who are not eligible for traditional funding. As you would expect, these loans come with exorbitant interest rates that are much higher than they are for applicants who are generally considered low-risk. A second chance loan is typically short-term financing. By making regular and timely payments, you can begin repairing your credit history and thus directly influence your credit score.
With an improved credit score, a borrower can, at the very least, access a second loan at favorable terms in order to offset the previous exorbitant loan and continue servicing the new loan that comes with favorable repayment terms. The punishing interest rate for the second chance loan serves as an incentive to the borrower to consider refinancing immediately if they qualify for a second loan under better terms.
2. Credit Unions
Members of credit unions can also get their credit scores fixed through credit repair loans. Since the financial depression of 2008, credit repair programs have been one of the many tools employed by credit unions to help members regain their financial footing. The advantage of this plan is that members don’t have to incur expensive interest rates, as is the case with banks, given that credit unions are member-owned and always serve members’ interests.
A credit union will help you get your credit score back on track and move from the high-risk bracket to a lower-risk bracket to be considered for funding. The goal of a credit union credit repair loan is to establish a remarkable payment history that can be used to calculate your credit score. Since an impressive credit history goes a long way in qualifying you for credit, repairing your credit history using a credit union repair loan is worthwhile.
3. Online Lenders
The internet has revolutionized every section of the financial industry, including lending. Today, you can apply for a loan online the same way you would apply for a traditional loan at the bank. There are numerous online lenders willing to advance you a credit repair loan to rebuild your tainted credit score. As with traditional banks, online lenders can sometimes give you loans at expensive interest rates owing to your bad credit in order to encourage you to seek refinancing once your credit score improves.
Bearing this in mind as you strive to rebuild your credit score, beware of scammers who promise instant results; it is not practical to get positive results overnight unless the lender is manipulating the system, which is illegal. Carry out your due diligence before settling on a specific lender to help you improve your credit score. It is crucial to scrutinize the legitimacy of the lender and to negotiate for better rates. This will help you avoid losing money in a bid to clean your credit history and establish a solid score.
How a Credit Repair Loan Helps Your Credit Score
As mentioned earlier, lenders consider your credit repayment history before they consider you for a credit facility. With a low credit score, a bank can either decline to loan to you or do so under extortionate interest rates. As such, the goal of a credit repair loan is to establish a solid history of debt repayment that will be used to calculate your credit score.
Repairing your credit helps improve your credit score, which in turn increases your chances of obtaining credit. Credit reporting agencies use your debt and bill payment history to determine your credit score. This explains why a cleaned-up payment history can help improve your general credit score and set you up for funding.
What Are the Requirements to Get a Credit Repair Loan?
When you have bad credit, your options for obtaining loans shrink considerably. There’s little you can do to negotiate for better terms or even a larger amount. Lenders rarely take chances with high-risk borrowers, which is why they impose exploitative interest rates on the loans and sometimes ask for collateral to minimize the risk.
The requirements for getting a credit repair loan include proof of identity. This helps to determine the borrower’s nationality and age. A driver’s license, passport, state-issued ID, military ID, birth certificate, or certificate of citizenship can suffice. Lenders also ask for income verification to prove that you are capable of making your loan repayments. Proof of address is one of the requirements that can vary among lenders.
How Much Does a Credit-Builder Loan Cost?
While credit-builder loans are important in helping you obtain your desired credit score, they come at a cost. These costs vary from one lender to another and the amount of loan needed, among other indicators. Among the metrics that affect the cost of a credit-builder loan are the principles and interest, application or loan processing fee, underwriting fee, origination fee, and appraisal fee if you are providing property or assets as collateral. Considering these, a credit-builder loan cost varies among lenders. Carrying out online credit-builder loan comparisons will help you get the best deals in the marketplace.
Credit Repair Loan Alternatives
Several vendors offer credible credit-repair loans both in the traditional system and online. Each vendor comes with its own system that is similar to or different from the competition. These systems range from online credit-building agencies, traditional banks, SACCOs, and credit unions, among others. As a borrower, opt for the option that best suits your individual needs.
Regardless of whether you are planning to get credit soon or not, it is always recommended that you keep your credit score high. This increases your chances of securing credit whenever you’ll need it. However, do not worry if you have bad credit since you can always get it repaired. Make use of widely discussed credit-repair loan techniques, as discussed by the sages at MoneyWizard.co, to repair your credit history.
Your credit score can have a big impact on your financial future. Sign up for Experian to get your credit score and credit report for free! Join millions of other Americans and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Experian won’t hurt your score.