How to Get a Loan with Poor Credit
Getting a loan with poor credit isn’t impossible. It may limit your options, and the options may not be too desirable, but you can still obtain a personal loan, car loan, or home loan.
The first thing you need to know is that you will be facing harsher terms. Typically, loans for people with with poor credit have a higher interest rate.
For comparison, the PCCU credit union, based in Indiana, offers a chart for Annual Percentage Rate, or APR, for car loans. For someone with a credit score between of 730 or above – the best tier of credit – a 5-year loan is 2.34 percent. Low credit, 599 or lower, has a drastically higher ARP, at 21.0 percent. If you bought a car for $15,000, with a 5-year loan at $3,000 per year, that’s a difference between paying about $70 in interest per year and $630 per year, costing you more in the long run.
Secured Vs. Unsecured
Next, it’s important to know the difference between secured and unsecured loans. A secured loan means you are backed up with collateral, such as your car or home. This is less risky for a lender, such as a bank, and makes the loan more attractive for them to approve. In other words, you may need to be prepared to put up something valuable in order to secure the loan. Should you fail to pay the loan back and default, the house, car, or other collateral are taken by the bank or lender.
Unsecured or personal loans do not have any collateral. Because of that, the interest rates are higher. They are typically smaller loans than secured, meant for purchasing a computer or furniture.
Another major difference deals with how the loans are taxed. Come tax season, interest on secured loans, such as student loans, can be deducted. Interest on unsecured loans, however, cannot be deducted.
Try a Credit Union
If a bank won’t give you a loan you can realistically pay back, try a credit union. Credit unions require membership — such as from a geographic location, labor union, or employer. Because credit unions are smaller and cater to a specific part of a community, it’s easier to get a loan. To them, you are not a faceless number, and they may be willing to overlook, or work with, bad credit scores. Since credit unions are member-owned, the loan is money from your community, giving you a better reason for paying the loan back.
Brother, Can You Spare a Dime?
Next, if neither bank nor credit union has terms you can agree to, you may try family or friends. Asking a relative is a tricky proposition, however. There may not be interest to pay, but your relationship could be at risk if you don’t pay the loan back.
Do not mistake this for an informal loan, however. It’s best to draw up legal documents, as though this were a loan from someone you did not know personally. Your friend or family member may insist on you paying interest, having loan terms such as a final due date or monthly payments, and there may be consequences for not meeting the terms.
Ask a Peer
Peer-to-peer lending, or social lending, allows for borrowing directly from a lender, with no financial institution as a middleman. This is a purely digital loan — there are no brick-and-mortar lenders, and everything is handled through a service. The company offering the service takes a fee for matching you with a lender and performing a credit check, while the lender — which runs with lower overhead — passes on the savings to you in the form of lower interest rates.
In short, you post the loan amount and what it will be used for, and investors can decide to offer you a loan. Because it’s an individual, they are likely to be more lenient when it comes to your credit score than a bank.
Convince a Co-Signer
Much like renting an apartment with bad credit, a fairly easy way to convince a lender to approve your loan is to find a co-signer. Someone with better credit signs on the loan with you, and should you default on the loan, the co-signer is expected to pay. Having a co-signer shows that someone else trusts you, and so should the bank or lender. Much like getting a loan from a friend or family member, this could cause a strain on the relationship, should you have trouble paying off your debt down the road.
There are a few parts of your financial record that will reflect negatively and, while they may not immediately disqualify you, they may take explaining. A judgement against you where money is taken from your accounts, such as a lien, shows you have already failed to make payments to someone else. Lawsuits in the same vein are also a dark mark on your record. Bankruptcy and foreclosures in your past may also paint the wrong picture for a lender, who may not want to risk you not having the money needed to pay back the loan.
Because you may be desperate for a loan when you have poor credit, there are plenty of predatory scams. For example, if there are upfront fees or the lender offers a loan without knowing your income, credit score, or other personal information, someone is likely trying to cheat you out of money. You can check a lender’s online reviews or their Better Business Bureau profile to see if they are a legitimate lender. Don’t feel pressured to make a deal, especially if you haven’t explored all of your options, be it lenders or another type of loan.
Also, beware of advance payday loans. While they may not check credit, and they are legitimate, their interest rates can be sky-high. For example, a typical credit card is between 12 and 30 percent, while an advance payday loan can be 400 percent.
Repairing Your Credit
The hardest way to get a better loan is to repair your credit. It’s a long road, and not easy, but the best way to build credit is through diligence and utilizing good financial practices. This results in better interest rates and less overall money you will have to pay.
In the meantime, it’s possible to find a lender that will approve a loan when you have a low credit score, though you will have to suffer a higher APR, a co-signer, or putting up collateral. There may be harsher penalties for missed payments or defaulting. But, despite limited options, if you are in dire need of money, it’s still possible to get a loan, even with bad credit.
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Cole Mayer is an online marketing specialist and corporate blog writer. A former newspaper journalist, he spends his free time freelance writing, playing video games, and learning about every subject under the sun. Follow Cole on Twitter: @ColeMayer42
This post was updated April 12, 2017. It was originally published March 23, 2017.