Is a Long-Term Loan Possible with Bad Credit?

Michelle Tuvey Michelle Tuvey | Loan Underwriter

The financial services market is structured in such a way as to reward people who have good credit with the best loan deals. That is a good thing inasmuch as it encourages people to use credit responsibly. Yet it has created this illusion that individuals with bad credit cannot borrow. The truth is they can. In fact, you could get a long-term loan based on the equity in your home even if your credit is less than stellar.

Just use your favourite search engine and look up the term 'loans with bad credit'. You just might find yourself pleasantly surprised by how many lenders are willing to take a look at your situation. You should be able to get a long-term loan unless some exceptional circumstances mar your credit history.

For the purposes of this post, we are talking about secured loans based on the equity in one's home. Secured loans are somewhat easier to get because there is less risk for the lender. How you would fare with other types of credit is another topic for another post.

What Defines Bad Credit

The first thing to understand is that the term ??bad credit' is open to interpretation. Assuming you could not get a long-term loan because of bad credit is not to give yourself the benefit of the doubt. Lenders define bad credit in different ways, depending on an applicant's circumstances and history.

There's a long list of things that contribute to creating bad credit, including:

  • past judgements and defaults
  • missed and late payments
  • overextension of credit
  • excessive credit enquiries
  • multiple credit declines.

You may have experienced financial difficulties in the past that you believe would inhibit your ability to borrow. But lenders may look at your past differently, especially if enough time has gone by. Likewise, more recent financial difficulties could result in a higher interest rate without necessarily disqualifying you from borrowing.

People with Bad Credit Still Have Needs

Banks, building societies and lenders are smart enough to know that even people with bad credit have certain financing requirements. The lenders perspective is not one of determining whether a borrower is 'worthy' to borrow; it is determining how much risk is involved in making a particular loan.

As an example, consider your credit score. It is nothing more than a mathematical representation of the likelihood that you will default on a loan. The higher your score, the less likely you are to default. But credit scores are not perfect. You could have a lower credit score due to something that happened in the distant past. A positive track record of making all your payments on time over the last 12 to 18 months could motivate lenders to overlook your credit score.

The point we are trying to make is this: you may have financing needs even if you have a less-than-perfect credit history. If you have equity in a home, you have a valuable tool for obtaining the financing you need by way of a long-term loan based on that equity. This is why we continually remind our readers that building equity is tantamount to building an ongoing source of financing.

If you are concerned about your ability to obtain a long-term loan due to poor credit, don't give up hope without at least trying. Shop around for some competitive loans and choose one to apply for. The worst that can happen is being turned down. But you are more likely to find a lender willing to work with you if you have the equity.

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