Personal loans can help with various aspects of daily living, including paying off existing debt, financing a new car purchase, or covering emergency expenses. However, many people, especially those in debt, believe that credit challenges may restrict them from borrowing and consolidating existing debts. While qualifying for a loan can be challenging for such borrowers, with the right strategies, they have a better chance of being approved for a personal loan.
1) Review Credit, Income, and Other Debts
A thorough financial review is important before shopping for loan options with poor credit. Various lending platforms help one access their credit scores for free. Credit bureaus like Experian, Equifax, and TransUnion will help one view their credit score. There are various benefits to reviewing credit, income, and debts.
- If any incorrect information is found when reviewing one’s credit report, like an unapproved inquiry or a settled account that still shows a balance, dispute the error with the credit bureau. Removing the error can prevent the score from dropping.
- Lenders often check if borrowers earn enough to cover their monthly expenses besides the newly issued loan. They typically consider the debt-to-income ratio (DTI) to assess a borrower’s ability to repay the new loan. This tool represents the percentage of the borrower’s monthly income that goes towards debt payments. A debt-to-income ratio below 50% is generally considered ideal.
One can use a DTI calculator to review monthly budgets and see how much breathing room remains for a new loan payment. The loan terms usually fit into the budget, leaving some money aside for savings and emergencies.
2) Calculate Monthly Loan Payments
A personal loan calculator can help identify how different loan amounts, repayment periods, and annual percentage rates affect monthly payments. It helps understand what adjustments are needed to make the loan amount affordable or the repayment term manageable. Annual percentage rates (APR) for bad-credit loans could range between 20% and 36%.
3) Speed Up the Application Process
Another step in getting loans faster with low credit is to speed up the application process. Do this by gathering all the documents necessary to apply for a personal loan beforehand. Some mandatory documents may include a government-issued ID, like a driver’s license, social security number, W-2 forms, and recent payslips. Other documentation includes the federal income tax forms and a recent bank account statement.
4) Add a Co-Signer
Having a co-signer can significantly improve one’s chances of getting a personal loan approved, especially if one has bad credit. A trusted friend or family member with a stronger income and credit history can make for the ideal co-signer. Lenders consider both the borrower’s and co-signer’s financial and credit profiles on the loan application. Note that a co-signer cannot access the loan amount or payment information. However, they will be legally responsible for making the repayments if the primary borrower fails to do so. Moreover, missed payments can affect the credit score of both the borrower and co-signer.
5) Use Collateral
Certain lenders might be okay to offer a personal loan on poor credit if the borrower adds collateral. A bank and credit union can allow borrowers to pledge their savings or an investment account as collateral. Some lenders, mainly those offering loans online, may provide auto-secured loans. Failure to repay the loans would result in the lender seizing the collateral and the borrower’s credit score dropping. So, always assess the benefits and risks before securing a loan with collateral.
6) Consider Co-Borrowers
Another way that financial institutions issue loans to borrowers with low scores is with a co-borrower. Here, the credit and income of the primary borrower and co-borrower are considered. However, unlike a co-signer, a co-borrower will have access to the funds and payment information. Both parties are responsible for the repayment. Also, missed or late payments will affect both their credit scores.
7) Compare Bad-Credit Lenders and Get Prequalified
All lenders have unique borrower requirements, features, and rates, so it is important to compare multiple lenders based on various factors.
- Requirements: The qualification criteria, like minimum credit score, may differ for each lender. For some, scores starting at 580 are acceptable, while others may only allow applications with credit scores in the 700 range.
- Loan terms: Always compare the APR, loan amount, and repayment terms to find the right lender. APRs for personal loans often range between 6% and 36%, while bad credit loan APRs could be higher. Furthermore, the loan amount can reach up to $1,00,000 for qualified borrowers. However, bad credit lenders may cap loans at $50,000, with repayment terms between two and seven years.
- Other features: Learn about all the additional features of a loan to make better financial decisions. Some lenders may offer credit-building tools, fast funding, and secured and joint loan options.
8) Look for Pre-Qualification Options
This is an ideal way to apply for unsecured loans, like a personal loan. A pre-qualification allows the borrower to check the potential loan rate, period, amount, and monthly payment. Comparing options makes it easier to pick lenders offering the lowest rates and monthly payments to suit one’s budget. Furthermore, the process will not affect one’s credit score.
9) Submit the Application
After getting prequalified and selecting the loan offer, submit the formal application. An online loan application can take a few minutes. Applying over the phone or in person could take longer. This will lead to a hard credit check, which could temporarily lower one’s credit score. If a lender does not require any more documentation, one will likely know about the status of one’s application within one or two business days. If approved, most lenders transfer funds within a day or two.
