How to Qualify for a Loan if You Have Bad Credit
In today’s financial climate, many people struggle with maintaining a good credit score.
Late payments, going over your credit limit, unemployment, or other financial hardships could lead you into a situation beyond your control. When credit bureaus lower your score, it becomes more difficult for you to obtain loans and other lines of credit from regular lenders.
Fortunately, all is not lost for those with low credit scores. There are a number of bad credit loans available from some lenders, including from us here at Associates Home Loan. These loans are meant to help you pay off debt, manage your monthly expenses, and rebuild your credit score to the point where you can receive conventional loans once again.
To help, here are five steps that you can take to qualify for a bad credit loan—and toward financial freedom, too.
1. Gather Your Personal Information
In order to apply for a bad credit loan, you have to have a complete picture of your own information and understand how your credit score is determined.
There are several free services available to check your credit score without affecting your report. Whichever you choose, make sure to check with all three credit bureaus: Equifax, Experian, and TransUnion. When you look at your report, you’ll see a list of which financial activities have made a negative impact on your score.
You should go over your reports with a fine-tooth comb to make sure there are no errors. You should also make sure that all of the closed accounts on your credit report have been properly reported. If an account isn’t closed and the credit limit is still showing on your report, this could be a black mark against you.
If you check your credit report, this will give you a good idea of where you stand with prospective creditors. It may also offer you insights about what you can do to repair your credit.
In addition to your credit reports, you’ll need to get information, including:
- Your annual income
- Your debt-to-income ratio
- A list of your regular monthly expenses and budget down to the dollar
- Your employment history (some lenders require employment records)
When you look through this information, you’ll be able to get a better sense of what you can afford, where you can improve, and how to better tailor your plan of action.
2. Talk With Your Bank
Once you have your financial information in hand, start looking at the minimum credit score required by the lending institutions you’re interested in.
An excellent place to start is with your own bank or credit union since you have an existing relationship with them. If you have a good relationship with your bank, ask them how you can get a loan. They may be willing to provide you with a small or secured loan to start you off. Ask them about their regular approval criteria to see how much further you would have to raise your score to take advantage of a regular loan.
Even if you’re not sure you want to take a loan, it’s important to know all the options available to you. Gather as much information as you can in order to make an informed decision.
3. Don’t Abandon Your Credit Score
It isn’t necessary to have a perfect 850 on your credit report to get a loan—but that doesn’t mean it’s fine to let your credit score tank if it’s already low. Lower scores mean higher interest rates and lower credit limits. You can take small steps now to start improving your score.
A good credit score is between 700 and 850. A fair credit score runs between 620 and 679. A bad credit score is generally under 580.
The best ways to improve a bad credit score are to pay down your debts as quickly as possible (without going into more debt in the process) and to review your credit reports for errors. If there are errors, call each credit bureau and get them corrected right away.
You should also limit the number of loans and credit cards you apply for to prevent acquiring too many hard inquiries on your account. Hard inquiries can damage your credit by up to 10 points. This drop is temporary, but it could be enough to lower your score significantly if you make too many inquiries.
Assuming everything else in your credit history stays positive, your score will start recovering within a few months. Waiting for a few months to get your loan may help increase your chances of getting approved.
Remember that improving your credit score is a time-consuming process. Do everything you can to start improving your score right away—and consider applying for a bad credit loan if you need funding right away.
4. Prove You Can Make Payments
Lenders need to know that you can repay your balance and interest. You need to make sure that monthly payments for a loan will not stretch your budget to the point of breaking. As a rule of thumb, try not to have debt payments above 36 percent of your gross income.
Proof of income in the form of tax stubs from work can be a big help. You may also want to consider getting a co-signer for your loan. Be careful when asking someone to co-sign and don’t ask someone who is also in bad financial shape because of the risk of damaging their credit, too.
5. Shop Around for Lenders (and Watch for Scams)
When you look for a lender for a bad credit loan, it’s important to choose a company you trust. Many fly-by-night companies are making shady loans that may damage your credit even further. Some online lenders promise no-credit-check loans to people with poor credit—but if it sounds too good to be true, it is. Another red flag is lenders who ask for money upfront, called advance-fee loan scams.
People with bad credit may feel they have limited options when finding a loan because of higher interest rates or lower credit limits. But that doesn’t mean that you have to do business with a disreputable company to get a loan.
Before signing the dotted line, check with your state’s regulatory agencies to make sure the lender is licensed and operating above-board.
Repairing Your Credit
If you follow these five steps, you may have an easier time getting a bad credit loan. Contact us at Associates Home Loans to learn about bad credit loans and find out what you need to do to apply.
When you rebuild your credit score using reputable lenders, you’ll be able to move forward with confidence. We’re here to help you and your family do just that.