Are you one of the over 60 million Americans with bad or poor credit?
If yes, you certainly know the consequences. For starters, since the Financial Crisis of 2008 banks have been tightening the lending noose, effectively locking out people with bad credit. Without access to loans, it can be difficult to reach your financial goals.
That said, getting a loan when you have bad credit is not impossible. As long as you know where to look and how to prepare your application, you have a solid chance of getting approved.
Keep reading to learn how to qualify for bad credit loans.
1. Understand What Bad Credit Loans Are
These are credit products designed for people with bad credit.
In other words, when you apply for a bad credit loan, the lender won’t reject your application because your score is in bad territory.
Will the lender check your score?
Not necessary, but those who want to access your report typically do a soft check that doesn’t negatively affect your current score. The lender can use your credit information to determine the interest to charge on your loan. This means that while having bad credit won’t get your application rejected, a poorer score will attract a higher interest.
Also, a bad credit loan can either be secured or unsecured.
Secured loans require borrowers to provide collateral such as house or car titles, and unsecured loans require borrowers to provide proof of income.
2. Know Your Credit Score
A common mistake borrowers make is applying for loans without establishing their personal creditworthiness. Indeed, about 60% of people in the United States don’t know their credit score!
Having a good handle on your credit standing enables you to make the right financial decisions. For example, if you already have bad credit and you keep applying for bank loans, your score will only get worse because banks perform hard credit inquiries.
Also, it’s not uncommon for credit reports to have errors. As such, when you take the initiative to review your report before going in for a loan, you could catch erroneous entries, get them fixed, and possibly improve your score.
Bear in mind even a single-digit improvement can make a big a difference. For example, if your current FICO score is 649, an increase to 650 will see your credit status change from poor to fair. This alone is enough to get you a loan at a better interest rate!
3. Identify the Lenders of Bad Credit Loans
If you’ve never applied for bad credit personal loans, you’ll be forgiven for assuming that banks and other traditional lenders offer them.
Well, these loans are typically offered by online lenders and other private informal lenders.
Perhaps you’re asking, “If banks have valid reasons for not lending money to people with bad credit, why should any other lender take the risk?”
The truth is lending money to people with bad credit is a risky move.
However, having bad credit doesn’t necessarily mean you’re unable to service a loan. It just means you made some financial mistakes in the past. Maybe you lost your job and, as a result, you defaulted on a loan or filed for bankruptcy, hurting your score in the process.
Online lenders know this, that’s why they place more emphasis on your ability to service the loan you’re seeking.
4. Prepare Your Proof of Income
While a bad credit score shows your creditworthiness, it doesn’t show your ability to service a loan. It’s for this reason companies that offer loans for bad credit will ask you to provide sufficient proof of your ability to repay the money.
If you have a job, for instance, your proof of income is your pay stubs. Most lenders will ask you to provide your stubs for the last couple of months, and some might want to see your employment contract.
What if you don’t have a regular job?
In this case, you must have an alternative source of income, such as a profitable small business. You’ll need to furnish the lender with the business’ registration documents and bank statements.
5. Get the Collateral Ready
Are you planning to take out a secured bad credit loan?
If so, you need to prepare the item you intend to put up as collateral. If you’re using your car’s title of ownership, for instance, ensure the details on it are up to date. You also need to purchase adequate insurance, since most lenders won’t accept an under-insured asset.
Keep in mind secured loans can turn out to be a nightmare if you default. The lender has a right to repossess the asset and sell it to recoup their lost money.
It’s vital to make a sound judgment before going in for a secured loan. Don’t borrow more than your monthly income can accommodate.
6. Find a Cosigner
When you’ve bad credit, a cosigner will significantly boost your chances of getting the loan amount you need.
A cosigner is an individual who agrees to assume financial responsibility on behalf of a loan applicant. If you default on your loan, your cosigner will be required to repay the balance.
The only problem is finding a cosigner can turn out to be a difficult task. If you have a reputation for mismanaging money and defaulting on loans, for instance, even your closest friends will turn down your request.
Plus, a cosigner has to be someone with good credit and enough income to repay your loan if things get there.
That’s How to Get a Personal Loan with Bad Credit!
When you’ve bad credit and you need a loan, it’s easy to fall into a state of despair when banks won’t approve your application.
The good news is there are lenders offering bad credit loans for people like you. Even better, we’ve just told you what you need to do make a solid application and enhance your chances of getting approved.
As you prepare to apply, what are your financial resolutions this year? Let us know in the comments!