If you’re wondering how to get a loan with bad credit, it often starts by looking at the reasons why you might not be approved, and understanding how lenders decide on who they might allow to borrow.
The typical lender often determines a loan application based on risk, and whether they think someone has the ability or will payback what they borrow. The most common way of doing so is usually based on a credit score.
For those trying to get a bad credit loan, a bad credit score is typically a factor for not being approved.
Whether you’re looking for an unsecured loan for a car, pay off credit cards, debt consolidation or another reason, if you have bad credit and your score is under 600 it can be very difficult to get approved.
Where to Start for Loans with Bad Credit
You should know what your credit score is before thinking of applying. There are a number of options to find out for free, and checking your credit score won’t affect your credit as doing so is considered a soft pull and doesn’t go against it.
While it can take time to improve your credit score if you have a bad credit rating, being aware of your your debt-to-income (DTI) ratio, also known as your utilization rate, is another way of improving how a loan application might be reviewed or assessed. Your debt-to-income ratio can be a big part of your credit score, and while your history of repayment is a big factor, managing your debt-to-income ratio can be another way of improving your overall score so that you might be able to apply for a personal loan even with bad credit.
In most situations a lender is looking at a debt-to-income ratio of less than 30%, since this is related to your ability to repay the loan and puts the lender at less risk of you defaulting on it.
Paying down debt to improve your debt-to-income ratio is the simplest option, and sometimes even debt consolidation can help.
Options for Loans with Bad Credit
If you’re looking for a larger sum in the way of a personal loan, a bad credit score can make it challenging to get approved. But if you’re looking for a smaller amount there might be some options available.
Some of the options for those seeking a loan with bad credit might include speaking with friends or family, which probably won’t run a credit check and might offer better interest rates, or even none at all. If your credit isn’t too bad, a credit union can be a good option since the allowable interest rate is usually 18% or less. Getting a co-signer can help to get a lower interest rate. Or consider trying online lenders, which can be very flexible with terms.
In addition to lenders for online personal loans, there are also installment loans and payday loans that can be another option for those with really bad credit that have trouble finding approval anywhere else. These types of lenders don’t always look at your credit score and might consider an application based on the amount of salary, pay frequency, length of employment with a company and other criteria. These types of lenders offer fast cash that can be deposited in your account, often as soon as the next day, but their interest rates are often much higher than most other options.
Ways to Improve your Credit Score
There are 3 main credit bureaus (Equifax, Experian and TransUnion) that can provide a credit score. Each don’t always provide the same score because one might have other details not captured by the others concerning your credit. If you’re ever applied for a credit card, auto loan, mortgage or other forms of credit, you have also heard of a FICO score, which many creditors use to assess how likely you might be to repay any debt.
The FICO score is mainly based on the credit bureaus and detail your credit activity and current situation. According to FICO, about one in ten might have a score of less than 550, which is considered poor credit and makes it considerably more difficult to get approved.
Some of the other ways (besides debt-to-income ratio) for improving your credit score include;
- Limiting the number of hard inquiries into your actual credit worthiness or score
- Disputing any errors you may find that can affect your score
- Always paying your bills on time to build a strong credit history
Even with bad credit a loan can be an option, but the terms might include higher interest, APRs, or annual percentage rates than those with a fair to good credit rating.
When looking for errors that can affect your credit score, some of the things to watch are often data management errors and can include;
- Incorrect personal information (i.e. address, misspellings)
- Incorrect public records (i.e. foreclosures, bankruptcy)
- Incorrect inquiries (i.e. hard checks that should not have happened)
- Missing account details (especially cases that could help your score)
- Accounts that are not accurate (i.e. listed as open when actually closed)
- Accounts that are listed as ‘closed by grantor (i.e. they say open but actually closed)
- Accounts that do not belong to you or duplicate accounts,
- Delinquencies, derogatory remarks or fraudulent activity
One of the easiest ways to improving or fixing your credit score often starts with identifying any incorrect information or inquiries that should not be associated with your account and going about having them removed to correct the details about your credit rating and history.
How Much Can a Loan Cost with Bad Credit?
Let’s say that your car breaks down and is in need of repairs.
A personal loan of $2,500 for someone with a good credit rating (e.g. FICO score of 740) could qualify for a loan with terms like a three-year personal loan at a 9.33% interest rate. This means that the monthly payments would be about $79.88 and they would have to pay a total of $375.82 over the life of the loan in interest.
But let’s say this person had a poor credit rating (e.g. FICO score of 580) and as a result the interest rate for the loan they are approved for was 35.89%. In that case, their your monthly payment would be $114.35 and they would have to pay a total of $1,616.70 over the life of the loan in interest charges.
In the above example, the loan for the person with poor or bad credit would cost an extra $1,240.88 for the $2,500 borrowed over the three-year term.
While trying to improve your credit rating can be slow and frustrating, it is possible, and their are lenders out there that will take on some risk for those with a poor or bad credit rating that can use a loan for unexpected expenses, emergencies, debt consolidation, big purchases and other reasons. When you have bad credit a high interest loan is sometimes the only option available.
RELATED: How to Avoid High Interest Loans
Other Factors to Improving a Bad Credit Score
While your debt-to-income ratio is an important factor, another is your payment history. Having a long history that shows you are capable of making payments on time is a big one. But if you have missed some, it can hurt your score. It should also be known that the effects of missing payments can also increase in how it hurts your credit score the longer a bill goes unpaid.
As mentioned, your debt-to-income ratio or credit utilization rate is also fairly important. Having unpaid balances from maxing out credit cards can hurt your scores by increasing your utilization rate.
The length of your credit history is another factor often considered, from the age of your oldest or newest account, to the average age of your accounts or whether you have used an account recently.
While the credit bureaus usually have slightly different scoring models, it can often look like this:
760-850 – Excellent
700-759 – Very good
660-699 – Fair
620-659 – Poor
Scores under 620 – Extremely poor
The Downside of Bad Credit Loans
When looking at getting loans with bad credit, be sure to read the fine print. While it should go without saying with any loan terms to know what you’re signing, with bad credit loans a lender wants some reward with the risk, and knowing the terms is important. Understanding the APR, interest rates and other particulars like orgination fees, late fees, or other fees is a must.
Not everyone has an emergency fund, and unexpected expenses can happen. Managing your credit profile so you don’t have a bad credit rating puts you in a better position in the future. Having bad credit impacts your options and makes it less affordable to borrow, but can also affect if you want to rent, get a mobile phone and more.
While improving your credit score isn’t going to happen overnight, it’s something that you should regularly monitor and manage. This way, somewhere down the road if you decide you wanted to get a mortgage, car, do some home renovations or something else and required a large loan, your odds of approval would likely be that much better, along with getting better rates and terms.