People with less-than-ideal credit and private loans should consider a different renewal process from the traditional products offered by banks. Understanding the differences and the options available to these borrowers about bad credit is important. Understanding what they can do as far as early renewal goes is critical, too, as is understanding all of their options. Getting the most from private loan renewal with bad credit means knowing how to secure favourable terms.
Understanding Private Loan Renewals for Borrowers with Bad Credit
A private loan is an excellent choice if you have bad credit and need the money quickly for a renovation, repair, or to stop a power of sale or foreclosure process. A bad credit private mortgage has a better chance of approval. Private lenders focus on the equity built up in a property, while more traditional institutions like banks and credit unions emphasize credit scores. Equity is the amount of any property that has been paid off and is mortgage-free.
There are several reasons someone can have a bad credit score. However, the most common ones include missing and late payments on bills, credit cards and loans or mortgages. Here’s some information about how to get your credit report online from Equifax and TransUnion.
The Importance of Early Renewal for Borrowers
If you’re a borrower with bad credit looking for early renewal, you’re probably trying to avoid defaulting on the mortgage. It’s important to remember that this can happen for a number of reasons, not just because you’ve missed a few payments.
A breach of a covenant occurs when the borrower breaks certain terms in a mortgage agreement, such as failing to pay the taxes, purposely damaging the property, or using it for illegal purposes.
With early renewal, you can avoid missing payments and get the money to prevent a power of sale or foreclosure. Early renewal might help you lock in a lower interest rate to divert more money to your payments.
This option through a private lender with a product like a second mortgage gives you time to divert money to make your mortgage payments and fix your financial issues.
Bad credit borrowers must also understand the products at their disposal to make a good decision.
Renewal Options for Bad Credit Borrowers
Private lenders are more flexible regarding applications than traditional banks and credit unions. Plus, they focus more on equity, which is the amount of a property that’s being paid off, rather than the credit score.
The short-term renewals that come with these products give applicants and borrowers time to fix their financial situation before they lose the property. Monthly payments can be reduced because interest-only payments are another option. That way, the money can be diverted to stopping a power of sale or line of credit.
These renewal options include:
- Second mortgages that are based on equity. These products are secured on a property with a first mortgage already. A private lender will accept money from self-employed businesses, contract work, and other irregular incomes. It’s essential to remember here that private lenders charge a higher interest rate because the risk is more significant.
- Debt consolidation is another alternative lending product that’s a good option for bad credit borrowers. It is also an excellent option for borrowers who are facing high interest rates, like on unsecured loans and credit cards. Even though a private loan has a higher interest rate than more traditional options, the money you get from consolidating your debts can be used to stop a power of sale and pay off debts.
A bad credit borrower is looking to fix their finances. Improving your credit score before renewing either an alternative loan or a traditional product is a good idea.
How to Improve Your Credit Before Renewal
Improving your credit puts you in a good position before renewing. Even with a private loan with bad credit, improving these numbers puts you in an excellent financial position. Here are a few ways to accomplish that.
- Making sure your bills are paid on time is a good way to improve your credit score. Equifax reports that making your payments on time accounts for 35% of your score. A quick way to do that is to set up automatic payments.
- Keeping your credit card balances below 30% of the available credit also helps to improve your score.
It’s also a good idea to monitor your credit report for inaccuracies. For example, a false report of an unpaid debt or missed payment can lower your credit numbers.
It’s important to remember that private lenders have a different focus when deciding on renewals.
How Private Lenders Assess Risk During Renewals
The Loan-to-Value ratio is an important metric used by private lenders. It measures risk by comparing the requested loans and any others already on the property to the appraised market value.
Most private lenders have an LTV of 75% for urban properties and 65% for more rural ones. These lenders also prioritize the value of the property and the equity of the homeowner when considering renewals.
These loans are usually short-term for bad credit borrowers, running from several months to one full year.
