Lenders Giving Borrowers Second Chance Loans

Brenda Woods didn’t want to move and leave the garden she had tended for 40 years. But the roof was falling in. And her bank wouldn’t give her and her husband Larry a loan to buy a replacement home.

Brenda’s still tending her garden, though, thanks to a second-chance loan from the New Hampshire Community Loan Fund-a Community Development Financial Institution (CDFI). It let the Woods replace their home with a new, safe, affordable, energy-efficient manufactured home.

Brenda and Larry Woods Nearly 700 families financed homes through the Community Loan Fund, which won a $5.5 million award from the Wells Fargo NEXT Awards for Opportunity Finance. The award was for expansion of an innovative financing program for manufactured housing mortgage loans. The NEXT Awards recognize innovative CDFIs that responsibly serve low-income and low-wealth people and communities.

Community Development Financial Institutions, which include banks, credit unions, loan and venture funds, are making second-chance loans where others may fear to tread. “We are looking for those loan opportunities that are most likely to play a transformational role in someone’s life, especially someone low income and low wealth,” says Mark Pinsky President and CEO of Opportunity Finance Network, a national network of CDFIs.

How CDFIs Help Borrowers

Credit leniency. While borrowers should expect a credit check, a poor credit score shouldn’t stop a borrower from exploring this option. “Virtually all the folks we see have low credit scores. Sometimes it’s a foreclosure, increasingly often it’s due to large medical bills,” Pinsky notes. And unlike traditional loans, consumers with poor or slim credit histories may find that their creditworthiness gets judged in part by how they have handled utility bills or rent – transactions that usually don’t appear on credit reports.

Flexible loan amounts. Ask your bank for a $2,000 loan and the teller may hand you a credit card application, but personal loans through CDFIs often range from $2,000 to $20,000, though the loan amount “can go as low as $500,” Pinsky says. Small loans like these are typically not attractive to larger financial institutions, who may not find them profitable enough.

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Willingness to take a risk. All of the institutions that make these loans serve low-income consumers and communities, and as a result may be able to extend credit to those who don’t meet the minimum income requirements of other lenders or those who traditional financing institutions consider “risky.”

Support beyond the loan. Those who get these loans find they often also get a good deal of support and borrower education (called “technical assistance”) to make sure they understand the terms of their loans and can hopefully pay them back successfully. “We might pull their credit report and show them how they can improve their credit score,” Pinsky explains.

Better loan terms. The interest rates and terms for these loans may be better than what the same borrowers may receive if they were to use expensive payday lenders or traditional lenders that finance borrowers with bad credit. Loan repayment terms may be more flexible as well.

CDFIs are often also used to fund personal, auto, housing and/or small business loans. The Opportunity Finance Network (OFN) maintains a directory of CDFIs at OFN.net. The approach appears to be working for those who get the loans and those who make them.

OFN reports that members have extended more than $30 billion in financing, with cumulative net charge-off rates of less than 1.7%.

As for the Woods family, they are thrilled with their CDFI loan. “It was very easy; a smooth process,” says Larry. “These things do take time, but it was reasonable.” They even had an extra reason to celebrate. Their loan was approved on Brenda’s birthday.

Other Second Chance Loans for Bad Credit Borrowers

One of the biggest things a lender considers before approving a loan is the amount of credit risk that comes with the borrower. Second chance loans, on the other hand, are offering second chance financing to those with less-than-perfect credit so they can achieve the financial goals they are trying to reach.

Second Chance Installment Loans

When you are offered a second chance loan, it’s important to make sure that you make each payment on time over the course of the loan. Following the repayment plan can help build a positive credit history which accounts for 35% of your credit score. Making on-time payments can significantly improve your credit and give your credit score a nice boost.

You pay back installment loans through monthly payments. Many of these loans will range from terms of between a few months to up to several years. The following subprime lenders offer these second chance installment loans for up to $35,000 for qualified borrowers.

Personalloans.com

If you need a loan between $500 and $35,000, then personaloans.com may be able to help. It accepts all types of credit and loans are available nationwide. You can use the loan for any purpose, such as for a car loan, and you get a quick loan decision. The interest rates for this type of loan range between 5.9% and 35.99%, which isn’t surprising for a bad credit loan. The loan term is typically between three and 72 months.

Personal Loans from Credit.com

You can apply for a variety of personal loans on Credit.com also. Loans are avalbile for all credit scores and offer terms up to 36 months and APRs starting as low as 22.74%.

BadCreditLoans.com

Badcreditloans.com offers loan amounts that don’t exceed $5,000. But it’s willing to help those with subprime and high-risk credit. It offers quick funding, and you can receive your money the business day after your loan is approved. The interest rate for this type of loan varies and can fall between 5.99% and 35.99%. Loan terms are typically between 3 and 60 months.

Short-Term Loans

If you need a short-term loan that you pay off sooner than installment loans, there are lenders who can help in this situation as well. Borrowers usually opt for a short-term loan when they need a smaller amount of cash and fast. These loans don’t go beyond a week to six months and are usually available for an amount between $100 and $2,500.

CashAdvance.com

For a smaller short-term loan, cashadvance.com welcomes people with bad credit and offers the borrower $100 to $1,000. It does require that the borrower have a monthly income of at least $1,000 per month and that they have been employed at their current job for at least 90 days. Cashadvance.com offers much higher interest rates and varied loan terms.

MoneyMutual

For short term loans up to $2,500, MoneyMutual provides an online marketplace of lenders that can provide funds to qualified borrowers in as little as 24 hours. Their online form is easy and straightforward and takes a few minutes to complete. Their interest rates and loan terms vary depending on the qualifications of the borrower and the amount of the loan.

Borrow with Caution

If you need cash fast but have poor credit, there are still options available to you.

However, borrow with caution. Some of the options for those with poor credit, come at the cost of higher interest rates, which can result in a much higher cost for the life of the loan. And if you can’t commit to the repayment plan and higher costs offer by subprime lenders, you put your personal finances and your credit score at risk.

Image: top, VStock; bottom, courtesy of the Woods

This article was last published June 10, 2013, and has since been updated by another author.