Getting a loan with bad credit is a very big relief option for consumers whose low credit scores limit their borrowing options. This loan is important because it can bail you out of a financial emergency, even if your credit score (something under 650) is a lot lower than you or most banks would like.
What are those emergency bills, bills like money to buy or repair a car; make payments on a medical bill and you don’t have a high enough credit score to get a loan from one of the big banks, don’t give up.
How to get a loan with bad credit
When you don’t have an emergency, the first step to get a loan with bad credit is to improve your credit score so you can comfortably afford the loan you need.
Start by making on-time payments, especially on credit cards; and reduce the balance on cards to under 30% of the credit limit allowed. Finally, don’t apply for any new credit.
The combination of those three factors – on-time payment; low credit utilization; no new credit applications – account for 75% of your credit score. It’s not unrealistic to think that making an effort on those three fronts could raise your score by 100 points in as little as 3-6 months.
If, however, this is an emergency and your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a bank or credit union loan officer for an in-person interview to convince them you are creditworthy.
If you get that interview, be sure you are prepared with documents that prove you’re a good risk. Lending institutions love stability. If you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for several years, it definitely helps your case.
Common things to bring that prove your creditworthiness include:
- Tax returns, W-2s and 1099 forms from at least the last two years
- Details of your job history, including salary and pay stubs
- List of assets such as home, car, property and where you stand on paying them off
- List of unsecured debts such as credit cards and medical bills
- Whether you pay or receive alimony or child support
- Bank statements for checking, savings and CDs
You should also expect the lender to ask questions about your credit history that may reflect negatively on you. Things like:
- Have you been involved in any lawsuits?
- Do you have any judgments against your or items in collection?
- Have you declared bankruptcy or had a foreclosure judgment against you?
- What is your ethnic background?
Where To Get A Loan With Bad Credit
There are some outlets for people looking for bad credit loans, but it definitely will take some shopping around to find interest rates and repayment terms you can afford.
The big national and regional banks stick tightly to credit score ratings so don’t bother with that unless you have taken time to clean up your credit report and raise your score.
If you don’t have time to improve your score, find a loan from the sources listed below.
Credit Union Loans For Bad Credit
A credit union – especially one affiliated with your employer or one that is community-based – may be willing to look beyond a poor credit history and make a judgment about whether it will loan you money based on your character and your promise to repay. Think of credit unions the way you would a small community bank from years ago.
The most promising aspect of a credit union loan is the interest rate ceiling of 18%, which applies to anyone, regardless of their credit score. A similar loan from a bank could run you as much as 36% interest.
That can make a huge difference in the payout you make on a bad credit loan. Let’s say you have a three-year, $10,000 loan. Here is the total repayment:
- 18% — $13,014.
- 36% — $16,489.
The chance to save more than $3,000 makes it worth looking into enrolling in a credit union. Almost all credit unions are actively looking for borrowers. If you can afford terms that match your credit history, you are likely to find a credit union somewhere willing to work with you.
If you are a veteran of the armed forces, you might want to approach the Navy Federal Credit Union or PenFed Credit Union. If you are a teacher or government worker, you might check out State Employees Credit Union or Schoolsfirst Credit Union.
Almost every consumer could qualify for some credit union. By joining, you could position yourself for much more favorable loan terms, regardless of your credit score.
Borrow from Family or Friends
This is dangerous from a relationship standpoint but makes a lot of sense from a financial and loan-anxiety standpoint because it should be easier to get approval and a break on terms.
Family and friends aren’t likely to put you through a grueling qualifying process and probably would cut you some slack on the interest rate charged compared to what you would get from lending institutions that make bad credit loans.
However, if you’re thinking about borrowing from family members or friends make sure to factor in what happens if you default. Not repaying a loan to a relative or close associate can poison relationships in ways that go far beyond a bad credit report.
Treat any loan from someone you know just as if it were an important business transaction between you and a stranger. That means it should be formalized with clear documentation and legally recorded. To avoid future problems, create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.
Get a Co-Signer
If borrowing from a friend or relative is not possible, you can still approach someone you know with good credit about co-signing on for a bad credit loan.
With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment. All payment information will be recorded on both your credit report and your co-signers, so if you default on the loan, or you’re late with payments, you both suffer. However, if you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.
Home Equity Loan with Bad Credit
If you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). Your home is used as collateral, and home equity loans can be obtained regardless of your credit score. The interest rate is usually low because the loan is secured by the home. Also, the interest you pay on a home equity loan is usually tax-deductible.
It is important to remember that tapping your home equity puts your property in jeopardy if you don’t repay the debt. But if you are disciplined and have a reliable source of income, it is an inexpensive way to borrow from a reputable lender when you have bad credit.