Getting ready to apply for a loan causes severe anxiety for people who know they do not have a great credit history. A lender thoroughly checks your entire credit report before they decide to lend to you or not. So what do you do when you know they won’t like what they find?
First, don’t panic! Many options still exist despite your poor credit history. Read on to breathe a little easier by learning how to apply for loans with bad credit.
What is a Bad Credit Score?
Not sure if you actually have bad credit? Your FICO credit score is the fastest and simplest way to tell whether you have bad credit. All credit scores range from 300 to 800 and the higher your score, the better your credit.
Most lending institutions use your credit score as a way to gauge the likelihood that you will pay back the loan. The definition of good credit vs. bad credit varies between lenders, but most consider a score below 650 as bad.
A bad credit score leads to a higher interest rate offered by the lender. People with a credit score of 650 or lower will see much higher rates than those with a score of 700+. A bad credit score will increase your interest rate to more than 5x that offered someone with good credit.
5 Brilliant Tips for Securing Loans with Bad Credit
So how do you know if you have a bad credit score and what do you do about it? Check out these 5 brilliant tips to help you secure a loan even with poor credit.
1. Review All Credit Reports
The very first thing you should do before applying for a loan is to check your credit reports and your FICO credit score.
Once a year you may request a free credit report from the three main consumer credit bureaus: Experian, TransUnion, and Equifax. Use these reports to double check for any fraudulent or incorrect marks against your credit score.
Sometimes errors occur and one of the bureaus will include a debt on your report that does not belong to you.
You should check these reports once every 4 months regardless if you need to improve your credit score. Your credit report will alert you to any worrisome activity affecting your financial record.
2. Improve Your Credit Score
Next, you need to start making moves to improve your credit score. Many factors contribute to your credit score, so try to focus on the ones with the most impact. Pay attention to the following factors when trying to get a hold of your credit:
Avoid maxing out credit cards, but continue to use them. Using credit cards wisely is a guaranteed way to build back credit.
Do your best to keep the amount you owe much lower than your credit limit. Aim to borrow no more than 30% of your total limit.
Even if you cannot pay back old debts right away, continue to pay down new ones every month. Keep all payments current and pay at least the minimum and more if you can afford it. Always pay on time as well.
Amount of Time with Credit History
The longer you keep accounts open while paying them off, the better your credit score. Do not close accounts just because you paid them off. Keep them open and only use them occasionally, making sure to pay them down at the end of each month.
Recent Credit History
The more credit accounts you open in a short period of time, the riskier you seem to lenders. Try to open credit accounts only when absolutely necessary and when you know you can pay them down right away.
3. Check with Multiple Lenders
If the first lender you approach immediately denies you, do not lose hope. Continue to shop around and get quotes from as many lenders as you can before applying. Most lenders offer different interest rates and calculate your creditworthiness in their own way.
Thanks to the Internet, you can get quotes from many different lending institutions without leaving your home. So do not accept the first one that makes you an offer. You never know what else could be out there.
4. Be Aware of Scams
While you shop around for a good price, be aware of the many potential scams targeting people with poor credit. Some lenders choose to offer loans to people with bad credit because they count on them not paying the loan back.
Avoid lenders offering car title loans, advance-fee loans, or payday loans since they tend to come with shorter terms, higher fees, and higher interest rates.
5. Get a Co-Signer
Another great tip for obtaining loans with bad credit is to enlist a co-signer. The lending institution will use the co-signer’s credit score and history to calculate the interest rate rather than using your poor history.
Be sure you choose someone with good credit whom you trust and who trusts you to repay the loan. The co-signer is just as responsible for making payments.
So if you fail to make your payments on time, it will affect their credit score.
Common Types of Loans for People with Poor Credit
If you cannot wait around for your credit score to improve, you still have options. Bad credit loans may cost you more in the long run, but they get money in your hand when you need it most.
The following types of loans are available to people with poor credit.
No Credit Check Loans
Most people think of no credit check loans when figuring out how to get a loan with bad credit. A lender offering no credit check loans does not care about your credit history.
They loan money to everyone but tend to charge higher interest rates.
An unsecured loan like a personal loan is another option.
You obtain an unsecured personal loan through a lending institution like a bank without offering any collateral in case you cannot make payments. These tend to have higher interest rates and extra fees associated with them.
A secured loan refers to a loan in which you offer collateral against the money you borrow. These are usually easier to access than an unsecured loan since the lender can repossess the item(s) put up as collateral. An example of a secured personal loan is a home equity line of credit.
If you want to avoid dealing with a bank or credit union entirely, you may want to consider peer-to-peer lending (P2P). A P2P loan means borrowing from an individual or investor through an online P2P service.
It’s similar to crowdfunding and proves an easy way to get an unsecured loan without going through the traditional channels.
Get More Clever Advice
So stop worrying if you need to apply for loans with bad credit. You can still get the money you need in the timeframe you need it if you don’t mind paying a little extra in the long run.
Want more clever advice on how to improve your personal finances and better manage your life?
Check out the Clever Dude’s website featuring tons of great financial tips as well as awesome advice on home and family that every clever dude needs to know!