Getting a loan with poor credit isn’t impossible. A low credit score may result in less desirable or limited options, but you should still obtain a personal, car, or home loan. We’ll cover everything, from the basics of how your credit impacts your loan application, to where you can find lenders that specialize in borrowers with poor credit.
Table of Contents
- 1 How Bad Credit Affects Getting a Loan
- 2 Is It Possible to Get a Loan With No Credit?
- 3 Process of Getting a Loan With Bad Credit
- 4 Know Your Loan Options
- 5 Recognize the Risks of Bad Credit Loans
How Bad Credit Affects Getting a Loan
Before we look at the “how” of getting a loan with bad credit, it’s important to understand how a bad or no credit score affects getting a loan. A credit score is a number that is used to determine an individual’s ability to pay back a loan. The lower the number, the worse your credit score is.
A bad credit score, below 600, may see you automatically declined from some lenders. It’s possible to find a lender that will approve a loan when you have a low credit score, though you will probably have to suffer a higher annual percentage rate (APR), a co-signer, or putting up collateral. The loan agreement may include 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.
Beyond your credit score, there are a few parts of your financial record that may be a red flag for lenders. While negative history items may not immediately disqualify you, they could take some explaining. Negative credit history includes:
- A judgment 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.
Is It Possible to Get a Loan With No Credit?
Yes, it is possible to get a loan with no credit. However, it is important to understand that applying for a loan with no credit history at all is trickier. It means the lender is taking a blind leap of faith by letting you borrow. The best way to build credit is through diligence and good financial practices. This results in better interest rates and less overall money you will have to pay.
Bad credit is different from no credit. If you know your score and it is on the low side, the hardest but most effective way to get a loan is to repair your credit. It’s a long road, and not easy, but debt recovery is possible.
Process of Getting a Loan With Bad Credit
When it comes to procuring a loan with poor credit, knowing the hurdles you may have to overcome can help you better prepare. Below are the different obstacles you may face when applying for a loan of any kind with bad credit.
Expect Higher Interest Rates
The first thing you need to know is that you will be facing harsher terms. Typically, loans for people with poor credit have a higher interest rate. Even if you are working with a lender who specializes in customers with bad credit, high-interest rates are a pretty standard feature of the loans being offered. You should also expect to only borrow limited amounts. The lower the credit score, the lower the cap on the loan. For example, at payday loan companies, which specifically target those who can’t get a bank loan, most companies will only allow loans of up to $1,000.
Provide Proof of Income
Before the lender enters into a loan agreement with you, they will likely require you to show you are gainfully employed, with a steady paycheck. When you have bad credit, your income is the next best indication that you can and will pay back what you borrow.
Proof of income will likely take the form of pay stubs. It may help to get a letter of recommendation from your employer, as well, to prove they have confidence in you as an employee, and you won’t be losing your job before paying back the loan.
Offer Collateral or Apply for Secured Loans
It’s important to know the difference between secured and unsecured loans. A secured loan means you are offering collateral, such as your car or home. If you fail to repay the loan, or don’t make payments on time, the lender would have a right to your property in lieu of payment.
On one hand, this is less risky for a lender and makes the loan more attractive for them to approve. On the other hand, if there is any doubt about your ability to make payments on time, it puts your personal property at risk.
In other words, you may need to be prepared to put up something valuable in order to secure the loan. Collateral-backed loans or any other arrangement which involves putting up collateral is just another way of describing a secured loan. More on this later.
Understand How Liens Work
While you may be more familiar with tax liens, liens can also be used with secured loans. For example, if you have a bank loan for your vehicle — which can involve a lien — but fail to pay, the creditor can repossess your vehicle, and then sell or auction it to recoup the money.
Liens represent your inability to pay, and will negatively impact your credit score, showing up on a credit report. If the lien remains unpaid, it will appear on your credit report for 10 years from the filing date; paid loans drop off credit reports after seven years.
Get a Cosigner
Much like renting an apartment with bad credit, a fairly easy way to convince a lender to approve your loan is to find a cosigner. Someone with better credit signs on the loan with you, and should you default on the loan, the cosigner is expected to pay. Having a cosigner 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.
If you aren’t comfortable with rejection, getting a cosigner may not be the best option, as even close family are likely to prove hesitant in cosigning a loan with you. They are trusting you to always pay in full, on time, or their credit will suffer for actions they didn’t even take themselves.
Despite this, your family members are probably the people who trust you the most, and should still be the first place you look. They probably already know the reasons you need a cosigner, and some may be willing to help you. If your family won’t cosign, try friends. Longtime friends might be willing to put their trust in you to not wreck their own credit score by cosigning with you.
The key to asking someone to be your cosigner is to be open and honest about how you came to be in this situation, and what you are doing to fix it. It may help to have numbers handy, especially what the prospective loan is, what the payments will be, and your income, to prove to a cosigner that you will be able to make payments.
Know Your Loan Options
There are different loans you may apply for. However, some lenders may be more willing to work with those who have little-to-no credit. Know your loan options ahead of time so you know which one will best compliment your needs.
A personal loan is a generic term for unsecured loans you take out for personal purposes. Unlike mortgages or auto loans, personal loans are not secured by the property you purchase.
Personal loans are usually based on your credit score, which then determines whether someone will loan you money, and at what interest rate. These must be paid off in a set amount of time. There are different types of personal loans.
Just had a kidney stone, went to the ER, and now you need to pay off medical bills but can’t do it up front? You probably need a medical loan. Often, the hospital can recommend you to a company that will help you pay your medical bill. It could be a personal loan, which you then use to pay off the bill, or the company could pay your bill, and then you pay back the company. This is still a loan, but the difference is who pays your health care provider.
In the first instance, the APR of the loan is based on your credit. In the latter case, depending on the company, you may be able to simply pay off the loan, and if you are able to do it within a set timeframe (such as a year), there may be no interest.
A payday loan is a type of personal loan that many people consider to be predatory. They are a type of loan that does not revolve around your credit score. Instead, the borrower simply needs a source of income, bank account, and their photo ID. These loans are usually small amounts, similar to what an individual might receive in a single paycheck.
A wedding loan isn’t technically its own type of loan. It’s just a personal loan used for a wedding, but has become a popular term mostly due to some clever marketing. As the wedding website The Knot puts it, “You can’t just walk into a bank and request a wedding loan.” However, it’s still popular enough to merit its own name. Just like any other personal loan, you have a set time in which to pay it off, with interest.
Lines of Credit
Different from traditional loans, lines of credit are revolving. This means rather than taking a set amount of money upfront, you are given permission to spend borrowed money, up to a certain limit. You don’t typically have to pay it off in full by a set date, but instead make monthly minimum payments as long as you are using some amount of the line of credit.
The most common example is a credit card. Just like loans, however, the APR of the card will be based on your credit score. If you have poor credit, cards with better rewards or low-interest rates will likely be unavailable.
Unlike a credit card, a home equity line of credit (HELOC) uses the equity in your house as a limit to how much you can borrow. You can only borrow for a certain period of time, usually between five and 25 years. It’s akin to having a second mortgage.
However, because of the often large limit, a HELOC should be reserved for bigger purchases, such as education or home improvements. Unlike credit cards or loans, the interest rate on a HELOC is variable, according to an index. You pay off the interest first, and then the principal of the loan. Lenders normally require HELOC applicants to have at least 20% equity in the home. Failure to pay back the loan could result in foreclosure.
Secured Credit Card
As an alternative to a personal loan, a secured credit card could be another answer to your money woes. Instead of borrowing, you give money to the bank. The bank then gives you the credit card, which acts like a debit card. Using a secured card builds credit, which you can then use to apply for a better loan.
Using a secured credit card means you won’t be getting money in the short term, and will be using money you essentially already had, but it will help you in the long run by improving your credit score if used responsibly. If you aren’t in urgent need of a loan, a secured credit card could help you repair your credit before you apply for a loan.
Borrowing From Family and Friends
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.
On the bright side, it’s highly unlikely a member of your family or a friend will ask to see your credit report before agreeing to a loan. Do not mistake this for an informal loan, however. It’s best to draw up a legal agreement, as though this were a loan from someone you did not know personally.
Peer-to-peer lending, or social lending, allows people to borrow directly from a lender, with no financial institution as a middleman. This is a purely digital personal loan — there are no brick-and-mortar lenders, and everything is handled through a platform. 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.
Loans With No Credit Check
Loans with no credit checks are typically offered by lenders who are interested in locking borrowers into high-APR contracts with steep default penalties. These could be personal loans, such as peer-to-peer loans, or could be from a lending company. Loans with no credit checks often carry substantially higher interest rates, as is the case with payday loans.
Unsecured personal loans do not have any collateral requirements. Because of that, the interest rates are higher. They are typically smaller than secured loans.
Another major difference deals with how the loans are taxed. Come tax season, interest you paid on secured loans, such as student loans, can be deducted. Interest you paid on unsecured loans, however, cannot be deducted.
If a bank won’t give you a loan you can realistically pay back, try a credit union. Credit unions require membership — often based on being in a geographic location, labor union, or having a qualifying employer.
Because credit unions are smaller and cater to a specific part of a community, it’s often easier to get a loan, even with poor credit. 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.
Recognize the Risks of Bad Credit Loans
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.
Here are a few types of loans that can be considered predatory, but are still last-ditch options for those in need:
A title loan is a secured loan that requires you to put up collateral in the form of your vehicle’s title. These types of loans usually have high-interest rates, with APRs between 100 and 300% being common.
In other words, by the time you pay off the loan, you will have paid at least twice the loan amount. For example, if you take out a $1,000 car title loan, with 100% interest over a year and with 12 installments, you will pay back $2,000 total by the end of the year. This can create a payment treadmill as you continue getting deeper in the hole trying to pay off the loan.
Beware of advance payday loans. While they may not check credit, and they are legal, their interest rates can be sky-high. For example, a typical credit card APR is between 12 and 30%, while an advance payday loan’s APR can be 400%.
It’s important to know your rights — and the lender’s — to be prepared if you decide to go this route. For example, they must disclose the APR (though they may present it in a different way, such as telling you that you owe $15 for every $100 borrowed instead of saying it’s a 400%APR).
If you default on the payday loan, you can’t be arrested. You can, however, be sued by the company. Failure to show up in court to face said lawsuit could result in a warrant for your arrest. The lawsuit could also end up with your wages garnished to pay back the loan.
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