Fixed-Rate Bad Credit Construction Loans Step by Step

Bad credit construction loans are typically more expensive for the borrower. Having bad credit sends a signal to your lender that you cannot be trusted to make your payments on time and pay the loan off on schedule. To protect against this, your lender will often charge you a higher interest. The lender may also ask you to assume an adjustable rate loan. This means they can raise the rate on your loan if you are delinquent on payments. To avoid this, opt for a fixed-rate loan by following these steps.

Seek High Risk Lenders

High risk lenders are often the best option if you have bad credit. These lenders are used to dealing with borrowers without the best credit scores. Instead of judging you solely on your financial history, they will evaluate your business plan and potential for profit. If they determine your monthly profits are high enough to pay off the loan, they may extend the loan even if your credit score is not up to par. 

Subordinate lenders are a good example of high risk lenders. These organizations are willing to take a back seat to your senior loans. Often, they will ask for a portion of your profits or income rather than assessing a high interest rate. Hedge funds, mutual funds and private equity groups are a good source of subordinate loans when your senior lenders have turned you away.

Offer to Secure the Loan

Securing a loan with an asset will always reduce the risk to the lender. Lenders will be more wiling to extend the loan, and they will often do so at a low, fixed-rate. Because they know they can always seize your asset and liquidate it to pay the loan, lenders have immediate protection against financial loss in the case of default.

You can use a piece of equipment, your business itself, or a personal asset like your home in order to secure a loan. It is better to use a business asset so you will not face personal financial issues f your business fails to perform on the loan.

Make a Greater Down Payment

Lowering the limits of your loan through a down payment has a two-fold affect on the expense of the loan. First, you will not be paying to finance the dollars you have allocated in your down payment. Second, you will reduce the risk of your loan for the lender. Lenders do not always like high down payments because it typically means they make less money on the loan. However, for high risk borrowers, lenders often prefer high down payments as a sign of good faith.

You may even consider taking a high risk unsecured loan to provide a down payment for the larger loan. The high risk loan can be financed at a higher interest rate over a shorter period of time. Even though this seems like a large expense, you may make up that expense in the low, fixed-rate on your bad credit construction loan over time.