A personal loan for fair credit can be a handy way to fund expenses like a wedding or home improvement project. But they aren’t always the right choice — often, you may be able to find a different product that could suit your budget better.
Credit cards, lines of credit and other financing all help you improve your credit score with frequent reports to credit unions. They also offer more flexible financing than some loans, which makes them a good alternative if you don’t need — or can’t qualify — for a personal loan.
What qualifies as fair credit?
The FICO scoring system is one of the most commonly used by banks, online lenders and credit card companies. It breaks down scores into categories, with fair credit being the second lowest.
Very Good: 740-799
So fair credit is any score between 580 to 669. Borrowers with fair credit may receive higher rates than borrowers with good credit and have less opportunity to borrow in general. However, there are still a variety of options out there — and many will help improve your score and give you access to better rates in the future.
Unlike a traditional personal loan, peer-to-peer (P2P) lending connects borrowers to investors. These investors may be individuals or a larger company, or a mix of the two. Because of this, the eligibility criteria are often less strict than with a personal loan funded by a single lender.
That being said, rates can also be higher, and P2P loans often take longer to fund. P2P lenders also charge high origination fees, sometimes as high as 8 to 10 percent of the loan amount.
Federal credit union loans
Looking into a federal credit union may be a good option if you have fair credit. Because credit unions are member owned, they are able to offer loans to borrowers who may otherwise be considered “too risky” by a larger bank.
In addition, the APR for credit union loans is capped at 18 percent, which means you will pay less overall. This is incredibly beneficial if you would otherwise be taking out a credit card or high-interest loan.
The major drawback is that you must be a member of the credit union in order to qualify. In many cases, you can open an account with a small sum during the application process. However, having an account isn’t the key to approval. You may still be rejected for a loan even after you become a member.
Credit cards can be a good way to build your credit score and increase your borrowing capacity — if you’re diligent about making payments. There are a number of credit cards for fair credit available, though they may have less competitive rates and fees when compared to similar cards for borrowers with good and excellent credit.
Still, they are worth looking into as an alternative to a personal loan. Rather than supplementing your spending, you can manage your day-to-day costs and pay off your card in full at the end of each billing cycle. This will help you avoid fees, build your credit and qualify for better cards — and loans — in the future.
Home equity loans and lines of credit
A home equity loan or home equity line of credit (HELOC) use your home’s equity as collateral. Because of this, you may be able to score a more competitive interest rate. This is partly because lenders will view you as less risky.
Ultimately, that means you are taking on the risk. If you are unable to repay your loan and default, you could seize your home in a foreclosure.
Despite that risk, home equity loans and HELOCs are a good option if you would otherwise not have access to the funds needed for a large expense. Schooling costs or large renovations can be covered by home equity products. And since they have lower rates than personal loans, they can be less expensive in the long run.
Lines of credit
Lines of credit for borrowers with fair credit are similar to credit cards. You will have a credit limit — typically a few thousand dollars — that you can draw from. You only pay interest on the money you use, and as you repay, you gain access to that funding again.
Lines of credit tend to have less fees and lower interest rates than credit cards, though. And unlike personal loans, they are more flexible. That being said, lines of credit are less expensive than credit cards because they don’t come with the same rewards. And they are also less common than personal loans, which may make it more difficult to find a product that suits your finances.
When to avoid financing all together
Loans and credit cards may be convenient, but they often come with high interest rates when you don’t have good credit. If you already have a lot of debt or don’t have a steady source of income, it is better to turn to alternatives.
Reworking your budget to accommodate a planned expense or to build up savings will benefit you in the long run. It may mean waiting longer to cover costs, but you will spend less money overall.
Alternatives to loans
If you do need to cover an immediate expense or simply don’t have the ability to handle the debt you already have, here are three options:
Negotiate with creditors. It isn’t the most pleasant task, but creditors may be willing to work with you to come up with a reasonable payment plan if you are struggling.
Nonprofits. There are national and local nonprofits and religious groups that may be able to help if you are experiencing a financial crisis.
Salary advances. Your employer — especially if you work for a large business — may be willing to offer you an advance on your next paycheck. Be cautious. Although this can help with a sudden bill or expense, you will have less money on payday.
The bottom line
A personal loan may be a common solution for financing, but it isn’t the only solution. Research your options to find the most cost-effective choice. Ultimately, fair credit won’t stop you from getting a loan — you just need to be aware of the costs associated with a personal loan, credit card or alternative.