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In a recession itâs common for many people to rely on credit cards and loans to balance their finances. Itâs the ultimate catch-22 since, during a recession, these financial products can be even harder to qualify for.
This holds true, according to historical data from the Federal Reserve Bank of St. Louis. It found that during the 2007 recession, loan growth at traditional banks decreased and remained deflated over the next four years.Â
Credit can be a powerful tool to help you make ends meet and keep moving forward financially. Hereâs what you can do if youâre struggling to access credit during a weak economy.
How Does a Financial Downturn Affect Lending?
Giving someone a loan or approving them for a credit card carries a certain amount of risk for a lender. After all, thereâs a chance you could stop making payments and the lender could lose all the funds you borrowed, especially with unsecured loans.
For lenders, this concept is called, âdelinquencyâ. Theyâre constantly trying to get their delinquency rate lower; in a booming economy, the delinquency rate at commercial banks is usually under 2%.
Lending becomes riskier in a weak economy. There are all sorts of reasons a person might stop paying their loan or credit card bills. You might lose your job, or unexpected medical bills might demand more of your budget. Because lenders know the chances of anyone becoming delinquent are much higher in a weak economy, they tend to restrict their lending criteria so theyâre only serving the lowest-risk borrowers. That can leave people with poor credit in a tough financial position.
Before approving you for a loan, lenders typically look at criteria such as:
- Income stability
- Debt-to-income ratio
- Credit score
- Co-signers, if applicable
- Down payment size (for loans, like a mortgage)
Does this mean youâre completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.
5 Ways to Help Get Your Credit Application Approved
Although every lender has different approval criteria, these strategies speak to typical commonalities across most lenders.
1. Pay Off Debt
Paying off some of your debt might feel bold, but it can be helpful when it comes to an application for credit. Repaying your debt reduces your debt-to-income ratio, typically an important metric lenders look at for loans such as a mortgage. Also, paying off debt could help improve your credit utilization ratio, which is a measure of how much available credit youâre currently using right now. If youâre using most of the credit thatâs available to you, that could indicate you donât have enough cash on hand.
Not sure what debt-to-income ratio to aim for? The Consumer Financial Protection Bureau suggests keeping yours no higher than 43%.
2. Find a Cosigner
For those with poor credit, a trusted cosigner can make the difference between getting approved for credit or starting back at square one.
When someone cosigns for your loan theyâll need to provide information on their income, employment and credit score â as if they were applying for the loan on their own. Ideally, their credit score and income should be higher than yours. This gives your lender enough confidence to write the loan knowing that, if you canât make your payments, your cosigner is liable for the bill.
Since your cosigner is legally responsible for your debt, their credit is negatively impacted if you stop making payments. For this reason, many people are wary of cosigning.
In a recession, it might be difficult to find someone with enough financial stability to cosign for you. If you go this route, have a candid conversation with your prospective cosigner in advance about expectations in the worst-case scenario.
3. Raise Your Credit Score
If your credit score just isnât high enough to qualify for conventional credit you could take some time to focus on improving it. Raising your credit score might sound daunting, but itâs definitely possible.Â
Here are some strategies you can pursue:
- Report your rent payments. Rent payments arenât typically included as part of the equation when calculating your credit score, but they can be. Some companies, like Rental Kharma, will report your timely rent payments to credit reporting agencies. Showing a history of positive payment can help improve your credit score.Â
- Make sure your credit report is updated. Itâs not uncommon for your credit report to have mistakes in it that can artificially deflate your credit score. Request a free copy of your credit report every year, which you can do online through Experian Free Credit Report. If you find inaccuracies, disputing them could help improve your credit score.Â
- Bring all of your payments current. If youâve fallen behind on any payments, bringing everything current is an important part of improving your credit score. If your lender or credit card company is reporting late payments a long history of this can damage your credit score. When possible speak to your creditor to work out a solution, before you anticipate being late on a payment.
- Use a credit repair agency. If tackling your credit score is overwhelming you could opt to work with a reputable credit repair agency to help you get back on track. Be sure to compare credit repair agencies before moving forward with one. Companies that offer a free consultation and have a strong track record are ideal to work with.
Raising your credit isnât an immediate solution â itâs not going to help you get a loan or qualify for a credit card tomorrow. However, making these changes now can start to add up over time.
4. Find an Online Lender or Credit Union
Although traditional banks can be strict with their lending policies, some smaller lenders or credit unions offer some flexibility. For example, credit unions are authorized to provide Payday Loan Alternatives (PALs). These are small-dollar, short-term loans available to borrowers whoâve been a member of qualifying credit unions for at least a month.
Some online lenders might also have more relaxed criteria for writing loans in a weak economy. However, you should remember that if you have bad credit youâre likely considered a riskier applicant, which means a higher interest rate. Before signing for a line of credit, compare several lenders on the basis of your quoted APR â which includes any fees like an origination fee, your loanâs term, and any additional fees, such as late fees.
5. Increase Your Down Payment
If youâre trying to apply for a mortgage or auto loan, increasing your down payment could help if youâre having a tough time getting approved.
When you increase your down payment, you essentially decrease the size of your loan, and lower the lenderâs risk. If you donât have enough cash on hand to increase your down payment, this might mean opting for a less expensive car or home so that the lump sum down payment that you have covers a greater proportion of the purchase cost.
Loans vs. Credit Cards: Differences in Credit Approval
Not all types of credit are created equal. Personal loans are considered installment credit and are repaid in fixed payments over a set period of time. Credit cards are considered revolving credit, you can keep borrowing to your approved limit as long as you make your minimum payments.
When it comes to credit approvals, one benefit loans have over credit cards is that you might be able to get a secured loan. A secured loan means the lender has some piece of collateral they can recover from you should you stop making payments.
The collateral could be your home, car or other valuable asset, like jewelry or equipment. Having that security might give the lender more flexibility in some situations because they know that, in the worst case scenario, they could sell the collateral item to recover their loss.
The Bottom Line
Borrowing during a financial downturn can be difficult and it might not always be the answer to your situation. Adding to your debt load in a weak economy is a risk. For example, you could unexpectedly lose your job and not be able to pay your bills. Having an added monthly debt payment in your budget can add another challenge to your financial situation.
However, if you can afford to borrow funds during an economic recession, reduced interest rates in these situations can lessen the overall cost of borrowing.
These tips can help tidy your finances so youâre a more attractive borrower to lenders. Thereâs no guarantee your application will be accepted, but improving your finances now gives you a greater borrowing advantage in the future.
The post How to Get Approved for Credit in a Financial Downturn appeared first on Good Financial CentsÂ®.
A consumer loan is a loan or line of credit that you receive from a lender.
Consumer loans can be auto loans, home mortgages, student loans, credit cards, equity loans, refinance loans, and personal loans.
This article will address each type of consumer loans.
Get Approved for personal loan today.
Types of consumer loans:
Consumer loans are divided into several kinds of categories. They include auto loans, student loans, home loans, personal loans and credit cards. Regardless of type, consumer loans have one thing in common: you have to repay the loan at some period of time.
Most people who are thinking of buying a car will apply for an auto loan. That is because buying a car is expensive.
In fact, it is the second largest expense you will ever make besides buying a house. And unless you intend to buy it with all cash, you will need a car loan.
So, car loans allow consumers to purchase a vehicle where they may not have the money upfront. With an auto loan, your payment is broken into smaller repayments that you will make over time every month.
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You can choose between a fixed or variable interest rate loan. But the most important thing is, whether you’re buying a new or used car, it’s important to compare loans to help you find the right auto loan for your needs.
Start comparing auto loans now!
Another, and most common, type of consumer loans are home loans. A home loan or mortgage is a loan a consumer receives for the purpose of buying a house.
Buying a house is, undoubtedly, the biggest expense you’ll ever make in your life. So, for the majority of consumers who want to purchase a house, they will need to borrow the money from a lender.
Home loans are paid back over a period of time. Those mortgages term are typically 15 to 30 years. They can be variable rate or fixed rate. A fixed rate means that your repayments are locked in for a fixed term.
Whereas a variable rate means that your repayments depend on the interest rate going up or down when the Federal Reserve changes the rate.
Over the loan’s term, you will pay back the principle amount of the loan plus interest. This makes it very important to compare home loans. Doing so allows you to save thousands of dollars on interest and fees.
The most common types of consumer loans are personal loans. That is because a personal loan can be used for a lot of things.
A personal loan allows a consumer to borrow a sum of money. The borrower agrees to repay the loan (plus interest) in installments over a period of time.
A personal loan is usually for a lower amount than a home loan or even an auto loan. People usually ask for $500 to $20,000 or more.
A personal loan can be secured (the consumer backs it with his or her personal assets) or unsecured (the consumer does not have to use his or her personal asset).
But most of them are unsecured, so getting approved for one will depend on your credit score, income and other factors.
But consumers use personal loans for different purposes. People take out personal loans to consolidate debts, such as credit card debts. You can use personal loans for a wedding, a holiday, to renovate your home, to buy a flt screen TV, etc…
Consumers use these types of loans to finance their education. There are two types of student loans: federal and private. The federal government funds a federal student loan.
Whereas, a private entity funds a private student loan. Generally, federal student loans are better because they come at a lower interest rate.
Believe it or not credit cards is a type of consumer loans and they are very common. Consumers use this type of loan to finance every day expenses with the promise of paying back the money with interest.
Unlike other loans, however, every time your pay with your credit card, you take a personal loan.
Credit cards usually carry a higher interest rate than the other loans. But you can avoid these interests if you pay your balance in full immediately.
Small Business Loans
Another type of consumer loans are small business loans. These loans are used specifically to create a business or to expand an already established business.
Banks and the Small Business Administration (SBA) usually provide these loans. Small Business Loans are different than personal loans, because you usually have to provide a collateral to get the loan.
The collateral serves as a way to protect the lender in case you default on the loan. In addition, you will also need to provide a business plan for the lenders to review.
Home Equity Loans
If you have your own home, you can borrow money against it. These types of consumer loans are called home equity loans. If you’ve paid off the mortgage on the home, you can borrow up to the full value of the home.
Vice versa, if you’ve paid half of the mortgage on the home, you can borrow half of the value of the house. You can use a home equity loan for several purposes like you would with a personal loan.
But most consumers use this type of loan to renovate their house. One disadvantage of this type of loan, however, is that you can lose your house in case of a default, because your house is used as a collateral for the loan.
Loan refinancing is a basically taking a new loan to replace an existing one. But you get this loan specifically either to refinance your existing mortgage or to refinance your student loans or a personal loan.
Consumers usually refinance in order to receive a lower interest rate or to reduce the amount of monthly payments they are making on their existing loans.
However, reducing to a lower payment will lengthen the time to pay off the loan and you will accrue interest as a result.
Consumers also use this type of loan to pay their existing loans off faster. However, some mortgage refinancing loans come with prepayment penalties. So do you research in order to avoid that extra charge.
The bottom line is consumer loans can help you with your goals. However, understanding different loan types is important so that you can choose the best one that fits your particular situation.
So do you need a consumer loan?
Get Approved for personal loan today.
Speak with the Right Financial Advisor
If you have questions about your finances, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
The post What Is A Consumer Loan? appeared first on GrowthRapidly.