Bad credit can feel like an albatross around your neck, preventing you from getting the things you need in life.
Lenders tend to be skittish about lending money to people with lower credit scores. But there are ways to get a personal loan even with bad credit…
In this article, we’ll share the secrets to getting a personal loan with bad credit. You might be surprised at some of the options available to you.
Now, before you take out a personal loan, it’s important to understand how they work and what the potential risks are.
Personal loans can help those with bad credit in a few ways.
- It can help merge all your debt into one monthly payment. This can help get a lower interest rate and get out of debt faster.
- Personal loans can help you make a large purchase. This can be anything from a new car to a down payment on a house.
- Getting a personal loan will improve your credit score and be a great way to improve your financial situation.
But What Is “Credit?” and Why Should You Care?
To start off with, it’s important to know what makes up your FICO (Fair Isaac Corporation) Score. This is a number that shows how risky you are to a lender. The number is based on information in your credit report from one (or more) of the major credit reporting agencies: Equifax, Experian, and TransUnion.
As it turns out, your FICO score is made up of five main factors each with its own specific score:
- Payment history is the most important factor in your credit score. This makes up 35% of your score. So, even if you have a low credit score now, improving your score means paying your bills on time.
- Credit utilization is the second most important factor in your score, making up 30%. It shows how much of your available credit limits you are using. By getting your balances as low as you can before applying for a loan, you’re showing creditors that you are a responsible borrower.
- Credit age is the third factor in your credit score at 15%. This is because the longer you have been using credit, the more of a history you have for lenders to review.
- Credit mix is the fourth most important factor at 10%. This shows a mix of different types of credit accounts such as a mortgage, auto loan, and credit card. If you’re looking to improve your credit score, consider diversifying your credit mix.
- Credit inquiries are important because they show how often you’ve applied for new credit. A high number of inquiries can indicate that you’re in financial trouble and are trying to get new lines of credit to cover your expenses. A soft credit check usually won’t hurt your score but a hard inquiry from a lender could decrease your credit score 5-10%. It can be a red flag for lenders, and may make it difficult for you to get a new loan.
Please don’t be discouraged by the list above because it looks daunting. There are still ways to get your loan even with a low credit score.
So, What Is Considered a Bad Credit Score?
A bad credit score is one that is below 755. Lenders see this as a sign that the person may not be able to repay a loan, and so they may charge higher interest rates or needs a larger down payment.
But (you say), your score is below that!
So, what is the bare minimum score you can have, and still get a loan from a lending institution?
- Conventional loan- 620
- FHA loan with 3.5% down- 580
- FHA loan with 10% down- 500
- VA loan- no minimum credit requirement is set by the VA, but lenders still may have their own minimum credit requirements.
When you apply for a loan, lenders will “pull” information on your credit report from one or more of the major credit reporting agencies: Equifax, Experian and TransUnion.
These are the standards they look at:
- 760-850 – Excellent
- 700-759 – Very good
- 660-699 – Fair
- 620-659 – Poor
- Scores under 620 – Extremely poor
Now The Question Is, Will You Be Able To Qualify For A Loan?
The answer depends on your unique situation.
But there are some things that we know for sure and those are the facts about how lending works.
- First off, lenders want to make sure that you are going to repay the loan you take out (and they don’t want to give away their money!). To do this, they take into account several factors in deciding whether you qualify for a loan:
- Your total debts
- Your income
- Your day-to-day debts
- Your job history
- Also, they consider how much they think you can afford to pay back over time.
Lenders consider these factors when determining your borrowing capacity. After all, other than your Mom, who would lend you money if they thought it was impossible for them to get it back?
Secured vs. Unsecured Bad Credit Loans
When lenders make their decision about whether to give you a loan, they’ll first figure out if your credit is good enough for an unsecured loan.
If it’s not, then you’ll need to look into secured loans (also known as “collateralized loans.”)
To qualify for a secured Bad Credit loan, the lender will need you to put a saleable asset as collateral in exchange for the cash. The collateral needs to be equal to or more than the amount you are borrowing. Real estate or other assets like stocks or bonds are commonly used.
Ways To Get A Personal Loan With Bad Credit
There are a variety of loans available for people with bad credit. Some, like mortgages and auto loans, don’t rely on your credit score at all, so they are easy to get regardless of your past experiences.
But, other types of loans such as personal loans or student loans require the lender to take into consideration your credit score.
But There’s Still Good News: It is possible to borrow money from lenders even with bad credit!
- Credit Unions are more disposed to look at the person and less at the poor credit score. They also cap their interest rates at 18% for everyone whereas banks will charge up to 36% interest rates.
- Equity Home Loans will use the collateral you have built up in your home over time against a loan. This will keep your interest rate low because the bank has something valuable to sell if you default.
- Credit builder loans are a type of secured loan where you use the loan funds to build your credit history. You make regular payments on the loan, which gets reported to the credit bureaus, and your credit score improves over time. With a secured credit builder loan, you pledge an asset, such as a savings account, as collateral for the loan. The loan amount is usually equal to the amount of the collateral, and you make regular payments on the loan over a set period of time. Once the loan is paid off, you get the collateral back and a better credit score.
- Peer-to-peer (P2P) lending is a type of financing that involves borrowing and lending money between individuals, without the use of a traditional financial institution, such as a bank, as an intermediary. P2P lending platforms are online platforms that match borrowers with lenders, and facilitate the loan process. Loans from P2P lending platforms may have lower interest rates and better approval odds than loans from traditional financial institutions. This is because P2P lenders evaluate borrowers using criteria beyond credit scores. You can find P2P lending websites by doing a search for them on the internet.
- Online loans are convenient, fast, and easy to qualify for. You can apply for an online loan from the comfort of your own home 24/7 and have the money deposited into your account within a matter of minutes. There are no credit checks required and you can get approved for an online loan regardless of your credit history.
- Co-signer or co-borrower can be anyone willing to be responsible for the repayment of the loan if you skip out on it. The interest rate charged will be based on the credit rating of the cosigner not yours. The lending institution records the payment history on both of your credit reports so by making all the payments on time will help increase your score over the time of the loan.
- Family or friends can be a great place to borrow from even if you are afraid to ask. We have all been to the Bank of Mom & Dad. But if there is any chance you won’t repay the loan, don’t ruin your relationships because of it. If the family or friend needs to borrow the money to lend to you, you can expect to pay the interest of their borrowing, at the very least.
- Payday loans are the last resort if you desperately need money and can’t get a loan anywhere. Known as predatory loans, you will need to pay it back within 2 weeks at an interest rate of up to 399% APR which works out to be $15. on every $100. you borrow. Yes, you read that right!
BE AWARE-Avoid Bad Credit Loan Scams
Predatory lenders (think loan shark) prey on people with low credit scores.
These “predatory” lenders don’t actually care about the FICO Score of their customers.
They’re only interested in how much interest they can charge you. By offering payday loans and cash advances to people with low credit scores, these companies have found a way to make their profits by preying on people who are desperate for short-term cash.
These companies often charge high fees and interest rates, and they can be very difficult to work with.
If you’re considering a loan from one of these companies, be sure to do your research and make sure you understand the terms and conditions, the fees and charges as well as any potential penalties for late or missed payments of the loan before you sign anything.
Final Thoughts
Let’s get this straight: A person with poor credit or no credit history can still get a loan.
The approval process for bad credit loans can be very challenging, but if you are patient and do your research, you will find a loan you can afford. There are many lenders who want your business, so don’t give up hope.
Look for lenders that specialize in bad credit loans, or use a collateralized loan.
*Tip: Do your research on lenders before you let a potential lender do a hard inquiry on your credit score. Only allow a hard inquiry if you are pretty sure you may use that lender.
