There are few (if any) positives to a recession. Not only can people lose their jobs, and businesses suffer losses, but the financial sector can batten down the hatches and make life difficult for loan applicants. This is especially true when bad credit borrowers are seeking large sums without the benefit of collateral, like a $20,000 unsecured personal loan.
Of course, getting these funds could make all the difference to those who are in difficult financial situations, but getting approval without collateral is never easy when the sum is above $5,000. But it is encouraging to know that lenders bear in mind the reasons for bad credit scores, with some seeing no reason to worry about such things.
But how is this logical? How can granting large unsecured personal loans to bad credit borrowers in recessionary times actually make sense? The fact is that other factors have always been more important than a credit score.
The Truth About Credit Scores
So what difference do credit scores make, and why is such a fuss made of them? Well, their key influence is to affect the interest rate that is charged. When it comes to seeking large loans without collateral, like a $20,000 unsecured personal loan, this can translate into quite high rates making the loan unaffordable.
A bad credit borrower will have a score of 650 and less, but anyone with a score between 550 and 650 have a good chance of approval. From 450, getting approval without collateral becomes quite unlikely, since the interest rate would be very high.
This is where the lender shows that repayments on a particular unsecured personal loan are simply too high to justify giving the green light. But the reason they can be overlooked too is that if an ability to repay the loan is proven, approval can be given. The necessary proof is provided by the debt-to-income ratio.
Ratios and Terms
The debt-to-income ratio is calculated by comparing the total monthly income and the total monthly expenditure. The difference is called the income excess, and it is this figure that the lender considers when estimating whether the $20,000 unsecured personal loan is affordable. Crucially, just 40% of the excess income can be dedicated to repayments.
When monthly repayments on existing debts are high, this lowers the excess income, so clearing at least some of the debts is a key strategy to approval without collateral. But this can take 2 or 3 months to affect.
A quicker and more effective way is to lengthen the term of the loan, thus lowering the size of the monthly repayment on the unsecured personal loan. For example, a $20,000 loan over 5 years (60 months) will have far larger monthly repayment sums than repaying over a term of 10 years (120 months).
Locating the Right Loan and Lender
Getting a $20,000 unsecured personal loan depends as much on finding the right lender as it does on satisfying the required criteria. Finding the best terms and conditions requires some searching, but the task is made easier by looking online. This is where the best deals are generally found anyway.
Of course, nothing is guaranteed, and even approval without collateral from online lenders is dependent on meeting the basic criteria to start with. However, these lenders are recognized experts in leading to bad credit borrowers, so the loans are structured specifically for those with financial troubles.
While traditional lenders have strict lending policies, online lenders charge lower interest rates and typically have longer terms. And some offer no credit checks on unsecured personal loan applications ensuring that credit scores are irrelevant, and the chances of approval are extremely high.