A personal, auto, or home loan is something you’ll likely need to apply for at some point in your life. You might think that there’s no chance of getting approved for a loan if you have bad credit. A low credit score can make it more challenging to get approved, and you’ll probably have less favorable terms, but it’s not impossible.
Understanding Credit Scores
Lenders use your credit score to gauge how likely you are to repay the loan without going into default. A lower score signals bad or no credit, while a higher score shows that you’re responsible and have proven that you can pay debts back. The definition of good or bad credit varies, but a score is considered bad below 650, fair up to 700, good from 700-759, and excellent up to 850. Follow these five tips to improve your chances of getting a bad credit loan.
1. Fix the Credit Problems You Have
You can’t fix the fact that you’ve got a late payment, but you can pay down any existing lines of credit you have. Reducing your credit card utilization to less than 30% of your available credit is ideal. Avoid applying for any new loans or credit cards when trying to boost your score.
2. Apply at Credit Unions
A credit union operates similar to a bank, but members in the same area or who work in the same industry, own it. They are non-profit and tend to have better customer service and lower fees than traditional banks. Do a quick Internet search to find credit unions that issue bad credit loans in your area.
3. Prove Your Creditworthiness
Show the lending institution that you’re a worthy borrower and bring proof when you apply. Banks like to see that you’ve been living in the same place for a consecutive period and prefer that you’ve been working at the same job for at least two years. Bring your paystubs to show current income and W2s from the past few years to prove you’ve been at the same company.
4. Offer Collateral
An unsecured loan becomes secured when you have something to offer the bank in exchange for letting you borrow the money. Some people use their vehicles or homes, in more serious cases, as collateral but keep in mind that if you fail to pay the debt back, then the lender can legally sell it to limit their losses.
5. Find a Co-Signer
You can improve your chances of getting approved by bringing a co-signer with better credit when you apply. A co-signer is listed on the loan and agrees that they will be responsible for the debt if you fail to make your payments. You’re also likely to get a lower interest rate, which results in lower payments and less interest paid over the life of the loan. A co-signer is taking a risk by agreeing to be on the loan for you, so ensure that you make your payments on time, so they aren’t responsible for your debt.
Qualifying for a loan takes some work and time, but you can get approved if you take the time to shop around and show that you’re a worthy borrower. Don’t allow your bad credit to ruin your chances of approval.