When you have bad credit, getting a loan isn’t easy, but it’s not impossible. But knowing what to look at when considering your options is also important.
There are a number of lenders that offer loans for bad credit. These types of loans are a more expensive way to borrow although they are an option if you can live with the higher interest rates.
Types of Bad Credit Loans
When shopping for a loan, you could say that you don’t actually choose one, and that it chooses you. This is because installment loans and personal loans rely on your credit score to help the lender determine whether you might be eligible.
Personal Loans – these are most suitable for people with a good credit rating or higher and often require a credit score over 700 to get approved.
Installment Loans – this type of loan is for fair to good credit customers and similar to personal loans with higher interest rates, usually requiring a credit score of about 600 to 700 for approval.
Payday Loans – this loan is for people with fair to bad credit, where they might have a credit score below 600. These have the highest interest rates and APR of all options and not rely on a credit score.
The type of loan that might be for you is really based on how suited to it according to how a lender sees your application.
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What Lenders Looks For
With most loan options, lenders are going to look at your credit score. With payday loans this is unlikely as most people that borrow a payday loan have a bad credit score and lenders know this, so no credit check is common for a payday loan borrower. This being the case, many payday lenders will use alternative data in combination with instant bank verification (IBV) details to review your account activity. Lenders will look for signs of whether you have any loans currently, how many if you do, and whether your payment history looks to be well maintained or do you miss payments. They also look for other details like late payments, NSF charges, collections, consumer proposals, bankruptcies, and other signs they might consider red flags.
Lenders of installment loans will look at a few things, including your credit score and also use alternative data like IBV and other references to gauge the risk involved with someone that is submitting an application. Another factor many consider which is not part of your credit score is debt to income ratio, or DTI, which compares their debt to your overall income. Some will also consider your credit utilization, which is a look at how much credit is used in comparison to what’s available. These are some of the challenges of a bad credit score when looking to borrow that you can work towards improving so you might qualify for better terms in the future. Other considerations that lenders look for would be your employment history, how long you’ve been at your current job, your current income, and the amount of the loan requested.
Does Bad Credit Prevent Getting A Loan?
For the most part, having bad credit does not prevent you from getting a loan, it just complicates things and make it more expensive to borrow. At the same time, know that the lenders willing to approve your loan request are going to have higher interest rates to help manage risk and cover the loss of default payments, which are more common with those that have bad credit. Having bad credit is something you can fix, which can open the door to better financial opportunities later.
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How to Improve Your Odds of Getting A Loan?
Finding a personal loan is unlikely with bad credit, these are reserved for those with a good credit score, As such, if they qualify for a personal loan they’ll get better interest rates. Those looking for bad credit lenders are most likely to qualify for payday loans or possibly installment loans.
If you want to be eligible for better loan rates and terms, you will need to fix your credit score. This can take time and there are a number of ways of improving your own credit score to become familiar with. Monitoring, managing and improving your score can help with qualifying for better borrowing opportunities in the future.
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Reasons for Being Denied a Loan
Often it would be your credit score that is the deciding factor as to whether you might get approved for a loan, except in the case of payday loans, since most lenders of payday loans are unlikely to look at the credit score of those that apply.
But with installment loans and personal loans some of the main reasons for being denied other than your credit score can be;
- Requesting too much to borrow when your salary or DTI doesn’t align with potential payments
- Having negative or derogatory marks on your credit report
- An inconsistent employment history (unstable income)
- A ‘thin’ credit profile
- Debts that weren’t disclosed
- Your income was something other than employment, which some lenders may reject
- Your personal details were not correct, which created an issue during credit check
- You have multiple other loans currently
- You failed to complete the application entirely, such as skipping the IBV step
- Your application didn’t meet other criteria of the lender
When payday lenders use IBV, which is also for identity verification, it can allow them to see payments towards debt, missed payments and how many loans you might have. All of these or a combination of them can be just some of the reasons for a loan request being denied or rejected.
If it isn’t an urgent need, its suggested that trying to improve your credit score would be your best option, so you might qualify for better rates in future. A good credit score is something to strive for, and if you have a poor credit history it’s never too late to try and improve your score.
It’s likely there will come a time in the future where you may need to borrow again, so if you currently have a bad credit score it would be good for you to have a better one in future so that you won’t have to pay as much to borrow then.
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You should also consider that you should only borrow what you can afford as monthly payments so you do not cause further issues with your credit score from late payments.