Getting a bank loan when you have a bad credit score can be very difficult. This can cause an uphill battle. Building and maintaining a good credit score is also challenging. It takes years of healthy cash-flow to achieve a good credit score which is easier said than done for most people. However, a traditional bank is not your only option when looking for a loan with a sub-par credit history – A Private lender could be the best option for poor credit.
Your Chances with a Traditional Bank Are Bleak
In addition to turning a handsome profit on loans, banks are also obligated to protect their depositors’ money. To this end, they have high lending standards put in place to ensure that only borrowers with the best credit score qualify. Their concern is that borrowers with poor credit scores might default on their loans. Thus making it much harder for those people to get approved.
Traditional banks’ strict lending standards results in a lot of red tapes that borrowers have to cut through. This takes a lot of paperwork and time – time that borrowers usually don’t have. Most borrowers with bad credit go through this process just to have their loan applications denied. On the other hand, private lenders are the better option for poor credit, as they usually lean in the other direction.
How Private Lending Companies Compare
Private lending companies are the go-to source for loans for people with bad credit because of their friendly policies. The best thing about working with a private lending company is it’s relaxed lending regulations, which is what makes it easier for borrowers with bad credit to qualify.
Private lending companies focus more on your current financial capabilities rather than on your credit score. It may take years to improve your credit score even if you are financially better off today. Your efforts to demonstrate your capability of paying back the loan – and your actual ability to do so – that matters the most to private lending companies.
Most borrowers with bad credit understand that they are more likely of qualifying for a loan with private lenders. However, the benefits of working with private lending companies do not stop there. Other reasons to consider private lending companies as the better option include:
Fast Approval With Private Lenders
The paperwork and red tape associated with traditional banks’ loan application takes a lot of time to get past – This can take months. This is often inconveniencing when your need for a loan is urgent – for example, you may have identified a lucrative business investment venture with a limited entry window. A bill is due very soon, or maybe you have run into unexpected automotive repair bills.
Private lending companies do not comb through every detail of your credit report, which is one of their best traits. They only focus on your present suitability for a loan and ignore the rest of the finer details. To this end, the application process is not only easy but also quick. Some private lending companies process loans in a day or two, which is a blink of an eye compared to how long it takes with a traditional bank. At SkyCap we strive to give you an answer within 24 hours of your application.
Fewer Fees and Setup Costs
The average private lender has fewer setup costs and ongoing administrative fees than most banks. This is because private lending companies have less paperwork and stipulations. They are also more lenient and friendlier to borrowers in a bid to establish themselves as the best lenders.
For example, many banks require borrowers to pay an application fee when submitting their applications. Other fees follow at different stages of processing the application. These fees can add up to hundreds of dollars. With these, you do not get any refunds if your application gets denied. In contrast, most private lending companies only charge for services rendered and only when your application qualifies for approval. You can find all fees associated with a SkyCap loan here.
In addition to a lengthy and strict application process, banks also have strict stipulations on how the loan money can be used. For example, if the purpose was to finance your mortgage or buy a vehicle, that is all you can do using the money. Any violations in these stipulations can get your loan recalled before time.
One of the best benefits of loans from a private lending company is the financial freedom to use them as you wish. Private lending companies are more concerned about your ability to repay the loan and less about how you plan on using it. Of course, the lender will ask your purposes for borrowing – make sure that your purposes are sensible or else the lender may reject your application. However, they will not recall your loan if you use some of the money for anything else, such as an opportunistic investment or an emergency. Most private lenders look to help you get out of financial trouble.
The common assumption is that loans from private lending companies come with high-interest rates. This is true to an extent, but the overall cost difference of maintaining loans from both options is not significant. In fact, the idea that traditional banks have favourable interest rates is more of an illusion.
A bank’s underlying interest rate is low because of huge financial resources and access to federal funds – the prevailing interest rate is about 2.5%. However, the spread on loans raises this interest rate – most banks have a spread of about 6%, which means that a borrower’s interest rate stands at about 8.5%.
Private Lender Rates
Private lending companies have higher underlying interest rates because of their limited financial resources compared to the bank. The prevailing interest rate averages at about 7%. However, their spread requirements tend to be lower than traditional banks’ – most private lending companies impose a spread of 5%. As such, the average interest on a loan from private lending companies is around 12%.
A difference of that percentage doesn’t count for much if you are borrowing a small loan. However, the costs may pile up if you are looking for a substantial loan with a long repayment period. Banks set their interest rates just slightly lower than private lending companies – the difference rarely exceeds 1% in most cases. The private rates are competitive and definitely worth it, considering all the other benefits of working with private lending companies.
A Chance to Improve Your Credit Score
As mentioned, it takes years of financial responsibility to build or improve your credit score. The process of getting a loan with bad credit is easier and quicker when working with a private lender. This lets you demonstrate your credibility by paying your loans on time. As such, working with private lending companies will help boost your credit score and improve it in the process. The over encompassing goal for private lenders is to help you, the client, get out of financial trouble.
Underlying Requirement: Large Down Payments
Private lending companies are the best option for people with bad credit in more ways than one. However, there is one major requirement among private lending companies: a substantial down payment. On average, traditional banks require a down payment of 5% on the total loan amount. In contrast, most private lending companies require down payments as high as 20%. They do this as one of the ways to minimize their risks and assess your willingness and capability to finance the loan.
Overall, It’s Worth It
Having weighed everything out it is clear to see that private lenders are a better option for bad credit. Their application process is easy and quick, and they have some of the best loan qualification and usage policies. They also act as a stepping stone to improve your credit. Most importantly, private lending companies may be your best viable option for a loan.