Let’s face it: Nobody likes to be judged. But when it comes to loans, it’s going to happen. Creditors are going to look deep into your credit history and make a decision about whether or not to lend to you. Lenders need to determine how risky it would be to lend money to a borrower. And if you’ve got bad credit, you might expect to be shown the door right away.
But don’t panic! Even if you have bad credit, it’s still possible to get a loan. Here’s how.
Know Your Credit Score and Know What It Means
Lenders know your credit score, and you should too. When you’re applying for a loan, that three-digit FICO score is going to play a big role in whether or not you’re approved. If you don’t know your FICO score, there are plenty of ways you can find it. You can check your credit score for free using Experian’s FreeCreditReport.com site; you can ask your bank if they provide free credit scores; you can even request one directly from FICO themselves—though they’ll make you pay for it.
So now that you know how to find your credit score, how can you improve it? Check out the OppLoans ebook Credit Workbook: The OppLoans Guide to Understanding Your Credit, Credit Report and Credit Score to learn if you have bad, fair, or good credit—and then, what you can do about it!)
When it comes to getting a personal loan, borrowers with a credit score above 720 typically pay an 11-percent interest rate. Those with subprime credit pay almost three times as much – 29 percent! For borrowers with a credit score below 550, many traditional lenders won’t offer a loan at all.
Sound Advice: Don’t despair! Borrowers with bad credit still have options like safe installment loans and certain “no credit check loans” (or “soft credit check loans”!)
Do NOT Take Out a Payday Loan
If you happen to fall into the “poor credit” category, you’ll likely find your loan application has been turned down at the bank. However, you won’t have to look far to find people, both online and on the street, advertising “quick cash” for borrowers with bad credit. Many of these are payday loans, and they are dangerous.
Payday lenders will likely give you a loan, but they’ll make you pay for it. Literally. You can expect an APR of 350 percent or more. Rates that high are how payday loans trap low income borrowers in a cycle of predatory debt. So if you’re thinking about taking out a payday loan, DON’T DO IT.
Worried you might be dealing with a predatory lender? Check out the warning signs in our ebook “How to Protect Yourself From Payday Loans & Predatory Lenders“.
If Your Credit Is Bad, Build It
Here’s the truth: Bad credit can mean that you’re going to have to pay more for a loan. It’s as simple as that. However, your credit score isn’t written in stone. If your credit is currently lower than you’d like, the best thing to do is build it up before taking out a loan.
We know, it sounds daunting. Also, it’s going to take a little bit of time. But don’t worry, you can do it by following these six steps.
Sound Advice: Stay below 30 percent of your credit card limit to boost your credit score.
Consider Personal Installment Lenders
Building credit sounds great, but sometimes emergencies happen and you need funds immediately. A payday loan might be tempting, but there are better options out there.
One place to look for a bad credit loan is with personal installment lenders. A personal installment loan can used to cover emergency expenses or to consolidate higher-interest debt. These lenders consider many factors when evaluating a loan application – not just your credit score –so you’ll probably have better luck with them. Also, not to toot our own horn, but OppLoans scores 4.9/5 stars with the Better Business Bureau based on customer reviews. Toot toot!
Opt for a Secured Loan
Secured loans are a good way for borrowers with bad credit to boost their appeal when applying for a loan. With a secured loan, a borrower offers an asset – a home or car, for instance – as collateral. It makes lenders more likely to approve a loan because they know they can take possession of the asset to cover their losses if the loan is not repaid. Just make sure you avoid short-term, high-interest title loans! They are definitely not worth the risk.
Sound Advice – Be careful when choosing collateral for a secured loan. If you default on the loan, you will lose your collateral.
Join a Credit Union
Credit unions are a good option for borrowers with bad credit. They’re like banks, but when you apply for a loan, they don’t evaluate you purely on your credit score. The trick, however, is that you have to be a member, so you have to convince them to grant you membership. They look at your financial health, but they also make a decision based on factors like where you live, where you work, or where you went to school. You can search for credit unions near you through mycreditunion.gov.
Sound Advice: Professional groups often form credit unions, so try to find one through your job.
Get a Co-Signer
Another option for borrowers with bad credit is to get a co-signer. With a co-signer, the interest rate for the loan will be calculated based on the credit rating of the person you sign with. So find someone with good credit who trusts you to repay the loan. But be careful. That person will be equally responsible for payment, so if you fall behind, they’ll suffer for it too.
Sound Advice: Cherish your co-signer. Payment information will be recorded to both of your credit reports.