Categorized | Bad Credit

How to Get a Loan With Bad Credit

how to get a loan with bad credit

Image via unsplash.com

If you’re wondering how to get a loan with bad credit, you must first understand what constitutes a “risky” borrower. In a nutshell, lenders consider your credit score as one of the most influential factors determining whether you’re a good candidate to extend credit to, or someone who is less likely to repay his debt.

A low or bad credit score may prevent you from securing a loan, or it may prompt lenders to demand higher fees and interest rates to compensate for the amount of risk they take on should they approve your loan application.

How Does My Credit Score Affect a Loan?

Housebuilding created using money

Image via pixabay.com

Lenders and banks use your credit score to determine your likelihood to repay your debt. This factor plays a critical role in your credit card and loan application.

Contrary to popular belief, your credit score differs depending on the formula used by credit reporting agencies. Nonetheless, your score does not factor in personal information such as your race and ethnicity, marital status, religion, or gender.

Despite varying formulae to calculate your credit score, most lenders and banks rely on the three major credit reporting agencies, Experian, Equifax, and TransUnion. Oftentimes, they use the “middle score” when deciding the most suitable rate based on your likelihood to repay your debt.

Your credit score will not just determine whether you’ll be able to secure a loan or get rejected, but will also influence your credit limit and the interest rate on your loan application or credit card. It may also come as a surprise that banks also use this score when approving checking and savings account applications—and the terms and conditions of these accounts.

If you are wondering how to get a loan with bad credit, bear in mind that low scores reflect a less attractive credit history, which is generally penalized with denial of loan applications or exorbitantly high interest rates.  Conversely, higher scores reflect a better financial position, which means you’re more likely to repay your debt, and above all, pay it off in a timely manner.

Range of Credit Scores

Man carrying debt

Image via pixabay.com

To reiterate, each credit reporting agency has their own formula to calculate your score and ultimately determine how risky it would be to lend you their money. Nonetheless, scores often range between 300 and 850 points; the higher the number, the more appealing your financial standing to lenders and banks.

The list below describes the general credit score breakdown:

  • Excellent credit score: 700 to 850
  • Good credit score: 680 to 699 (surveys have shown that average Americans score 682)
  • Average credit score: 620 to 679
  • Low credit score: 580 to 619
  • Poor credit score: 500 to 579
  • Bad credit score: 300 to 499

While some lenders use the term poor credit score and bad credit score interchangeably, most financial entities consider anyone with a score under 620 to be a risky creditor. If your score is under 620, you are probably brainstorming how to get a loan with bad credit.

What Is Considered Bad Credit?

Man writing on the document

Image via pixabay.com

If you often wonder how to get a loan with bad credit, you must first understand what constitutes bad credit and why some people are labeled as risky creditors.

To reiterate, consumers whose credit score is under 620 are considered risky creditors and thus they are generally slapped with higher interest rates and a lower credit limit. Bad credit generally stems from late or missed payments, maxing out credit cards, and major financial setbacks (e.g., home foreclosure and bankruptcy).

Take note that there are five factors that make up your credit score; the amount of debt you have and your payment history are the two most influential factors that affect your credit score. Credit reporting agencies also base their calculations on your credit history, new credit inquiries, and credit mix.

How to Improve Your Credit Score

While having bad credit makes it extra difficult to secure a loan, there are several ways to free yourself from this financial rut, although it requires careful planning and a ton of discipline and patience. After all, it generally takes seven years before most negative notations on your credit report disappear (although sometimes they may take longer).

Consequently, if you’re finding yourself asking how to get a loan with bad credit, it would be more appropriate to ask yourself how you can improve your credit score.

Read on for information on how to improve your credit score and ultimately free yourself from mounting debts, while also learning how to get a loan with bad credit.

Know Your Credit Score


You can visit the sites of large credit reporting agencies to learn about your credit score, or you may also visit your local bank and ask if they can provide you with this critical financial information. Ideally, you should review your credit report every year so you can dispute any errors you find.

Avoid Payday Loan 


If you find yourself in a vicious cycle of mounting debt, your limited borrowing options may force you to settle on quick cash for borrowers with bad credit. However, avoid these payday loans like a plague, because they come with an exorbitantly high annual percentage rate, or APR, which is the interest rate you pay for borrowing money. Running towards predatory lenders is just a palliative solution for your money problem. The high APR can trap any low-income borrower in a cycle of debt.

Consider a Secured Loan


This entails borrowing against your assets such as your home, car, funds in a savings account, bonds, stocks, etc. This borrowing option typically comes with lower interest rates because the lenders can take the asset in the event that the borrowers are unable to repay their debt. Of course, secured loans come with some drawbacks such as the loss of your asset if you’re unable to repay your loan. Another thing to keep in mind is that lenders generally offer less money than the value of the asset - usually 50-90 percent.

Consider Personal Installment Lenders


Personal installment loans are helpful in consolidating higher interest debts or covering emergency expenses. Unlike traditional lenders that are overly focused on your credit report and score, they also look into other factors, such as your employment history, cash flow, income, education, and home ownership. Consequently, you’ll probably have better luck with this financing option.

Join a Credit Union 


While they operate like most banks (i.e., they extend credit to consumers), they don’t just base their decision on your credit score. However, you have to be a member of a credit union and must be able to demonstrate your ability to repay your debt.

Get a Co-Signer


In this financing option, the lenders calculate your interest rate based on the credit rating of the person you sign with. Take note that your co-signer is equally responsible for the debt, and so if you fall behind, they will also face the same financial consequences.

Practice Financial Discipline


Be sure to pay all your bills on time, don’t use too much of the credit just because they are available to you, and apply only for the credit you need.

Consider the Snowball Method to Pay Off Large Debts


If you are drowning in debt, you may want to pay off the smallest account first before you move on to the next largest. Financial experts have noticed that wiping a debt out in its entirety, no matter how small the amount is, can give people psychological satisfaction and strong motivation to tackle their money problems. But from a financial perspective, the best way to tackle your mounting debt and improve your credit score is to pay off your highest rate bad debt first.

How to Get a Loan with Bad Credit

The aforementioned tips on how to improve your credit score can help you secure a loan despite having a bad credit. In addition, start by making timely payments, especially on credit cards, with the goal of reducing the balance to under 30 percent of the credit limit allowed. While tackling your bad debts, make sure you don’t apply for new credit cards.

Focusing on these three main factors - timely payment, low credit utilization, and no new credit application - has been shown to raise a credit score by 100 points on average in as little as 3-6 months. This is one method for how to get a loan with bad credit.

Conclusion

Piggy bank with money

Image via pixabay.com

Contrary to popular belief, having bad credit does not automatically mean your borrowing options are limited to predatory loans that come with exorbitantly high interest rates that can trap you in a vicious cycle of debt. Credit unions, personal installment lending, a secured loan, and a co-signer loan are just some options that you might want to consider.

Of course, it is equally important that you change how you view money, so never forget this old adage: Credit is a way to borrow against your future. Consequently, make sure you don’t use all the credit options just because they’re available (and don’t max them out), pay your bills on time, and only apply for the credit you need.

Should you find yourself drowning in debt, which of course can damage your credit score, it is often ideal to pay off the account with the highest interest rate first. But for those who need a morale boost, wiping out the smallest debt first before you proceed with a bigger challenge also makes sense. Hopefully this article has taught you how to get a loan with bad credit.

Be Sociable, Share!

Comments are closed.