Yes, Loans are Still Available
While some people can get a loan without hassle, those with poor credit may find it challenging. In this article we cover everything you need to know about getting a loan with bad credit.
What Does It Mean to Have Poor Credit?
Poor credit doesn’t happen overnight. It’s often a reflection of your financial habits over some time. It clearly reflects a history of poor financial decisions and mismanagement, particularly in the form of:
- Late payments of credit loans.
- Defaulting payments of credit loans.
- High debt-to-income ratio.
- Frequent credit enquiries.
- Declaring bankruptcy.
People with poor credit scores are considered a high risk by many lenders. In cases where their loan requests are not outrightly denied, they are often charged higher interest rates. Poor credit can also limit your employment opportunities and real estate options.
What are the Available Loans for People with Poor Credit?
Although poor credit limits your loan options, you may still be able to get a loan through some alternative routes. Some lenders specialize in providing loans to people with low credit scores. Your options include:
Personal Loans
Some lenders offer personal loans to borrowers with credit scores below 640. However, borrowers must meet the lender’s consideration criteria. These would often include a reliable employment history and educational background.
Secured Loans
Having collateral is a guaranteed opportunity to get secured loans with many lenders. Since the lender can hold on to something in exchange for the loan, the risks are lower. The lender is also more confident that the loan will be recovered.
Credit Union Loans
This is a form of communal or collaborative support for union members. By belonging to a credit union, you can enjoy a number of loans with affordable interest rates. The lending criteria are also more flexible than traditional banks.
Peer-to-Peer Loans
Some platforms facilitate peer-to-peer lending by connecting borrowers with poor credit to individual investors willing to lend out their money. These platforms are often unregulated, so the terms and conditions to qualify for loans are quite flexible.
Co-signer Loans
This works only if you can find someone with a good credit score who is willing to partner with you as a co-signer. The co-signer becomes your surety and agrees to take responsibility for the loan if you default. This increases your chances of being approved for a loan.
Steps to Apply for a Loan with Poor Credit
Regardless of your preferred loan options, there are specific steps that are essential to your securing a loan. The steps range from a personal reflection of your financial habits to finding the best loan option.
- Check your credit report. Before applying, review your credit report to understand your credit situation. Look for any errors that may have influenced your credit score and have it corrected.
- Review your options. Identify lenders that specialize in loans for people with bad credit. Compare their terms, interest rates and eligibility requirements to find the best fit for you.
- Organize your documents. Lenders are going to want to see your financial records before approving any loan. So, it’s only reasonable to prepare necessary documents before hand. These documents would include your proof of your income, identification, employment and educational history.
- Follow through with the application. After choosing your preferred loan option, fill out the loan application with accurate information. Be honest about your credit situation. Transparency is key to getting your loan approved. Review your application and submit your application to the lender.
- Review the loan offers. If your application is approved, the lender will offer you some loan options. Before choosing any loan options, ensure you review the terms and conditions. Review the interest rate, repayment schedule and any hidden fees. Make sure you understand the total cost of the loan before accepting it.
Steps to Improve Your Poor Credit Score
Despite your current credit score, you can move past needing loans for people with bad credit to build a good credit score. Improving your credit score is a vital step to accessing better loan options and achieving financial stability.
Here are some effective strategies to boost your credit score:
Pay Your Bills on Time
Your payment history is the major determinant of your credit score. By consistently making payments on or before their due dates, you will demonstrate reliability, which can significantly improve your score over time. You can use reminders, alerts and automatic payment tools to ensure you never miss a due date.
Keep credit utilization low
Use less than 30% of your available credit limit as much as you can. High credit utilization is a signal to lenders that you may be overextended financially. This will also lower your credit score.
Limit new credit inquiries
Do you know that every time you apply for credit, a hard inquiry is made on your report? Well, this can temporarily lower your credit score. It’s important that you avoid applying for multiple credit accounts in a short period.
Diversify Your Credit Mix
Have a variety of credit types. Let your credit portfolio include credit cards, installment loans and retail accounts. This will positively influence your credit score. But, you should only take on new credit you can manage responsibly.
If you're trying to manage debt effectively, check out our article on debt management services.