How to get a loan with bad credit

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Accessing credit, such as a loan or a new credit card, has become more difficult this year. And if you have a credit rating that lenders deem “bad,” that’s even more difficult.

Responding to economic uncertainty, banks have tightened household lending standards in all major categories in 2020, including mortgages, credit cards, cars and consumer loans, according to data from the Federal Reserve.

Lenders and creditors use your credit score and the details of your credit report to determine your creditworthiness or the risk they might take by lending you money. If you have a bad credit rating, lenders may view you as riskier, making it difficult to get both loan approval and favorable terms.

For example, a bad credit rating can cause your mortgage lender to approve you for a higher interest loan. But even a small percentage difference could charge you thousands of additional interest over the life of the loan. And some lenders or credit card issuers may not approve you at all with bad credit, or may charge higher fees to offset their risk.

But bad credit doesn’t stick around forever, and if you need to borrow money, there are always ways to get approved even with a low score. Here’s what you need to know:

Do you have bad credit?

To determine what you qualify for and start improving your credit score, you need to know where you are starting from. You can view your own credit report, on which the credit score is based, free of charge at AnnualCreditReport.com. Until April 2021, you are entitled to one free credit report each week from each of the three major credit bureaus – Equifax, Experian, and TransUnion.

Each lender sets their own credit scoring standards, and one may judge your score differently from another, but you need to have a general idea of ​​where you stand among credit users. You can check your credit score for free through your online banking portal or your credit card issuer, or purchase access from a credit bureau.

Credit scores generally range from 300 to 850; The FICO ranks 300 to 579 as “very poor” and the Vantage Score rates between 300 and 600 as “poor” or “very poor”.

Credit rating FICO Score Range
Very poor 300-579
Fair 580-669
Good 670-739
Very good 740-799
Exceptional 800-850
Source: MyFico
Credit rating VantageScore range
Very poor 300-499
Poor 500-600
Fair 601-660
Good 661-780
Excellent 781-850
Source: Experiential

These ranges can greatly influence the amount of interest you pay on a loan. For example, a person with a FICO score of 500 to 589 will pay an average of 16.4% interest on a new car loan over five years, while a person with a score of 690 to 719 will pay an average of only 5. , 39%. You can use this FICO calculator to see how interest varies between different credit scores and loan types.

Another thing to keep in mind is that you don’t need to have a history of bad credit to end up with a low credit score. If you’re just starting out with no credit history, your slim credit profile can also lead to a bad credit score, making it difficult to access products that can help you build your credit. It takes years of timely payments and sound use of credit to achieve a great credit score.

Be careful

If you have bad credit, be careful about which lenders you turn to – potential scammers and illegitimate loan companies may see a low credit score as a target.

Look for any company that guarantees you’ll qualify for a loan before you even apply, or that uses language like “Bad credit?” No problem ”and“ Get the money fast, ”warns the Federal Trade Commission. These types of lenders could charge large hidden fees or even use your information for identity fraud.

Pro tip

Bad credit can make you an easy target for predatory lenders. Be on the lookout for any illegitimate business or predatory loan offerings, which could lead to more credit problems and increased debt down the road.

Payday loans and title lenders are other common types of loans that you should avoid at all costs. These lenders often target consumers who have few credit and loan options. But they also charge astronomical interest rates which, for many borrowers, can result in a continuous cycle of unpaid and growing debt.

By turning to predatory lenders, “you’re going to pay 300-400% APR, and that’s devastating,” says Michael Sullivan, personal financial consultant at the nonprofit financial education organization Take Charge America. In contrast, the current average APR (or annual percentage rate, the actual annual cost of your loan) is 14.52% for credit cards and 9.5% for personal loans.

How to get a personal loan with bad credit

1. Contact your current bank

If you have an established banking relationship with a financial institution, try leveraging it to get a loan, even with bad credit.

“Having a relationship with a financial institution that will listen to your needs is essential,” says Felicia Lyles, senior vice president of retail operations at Hope Credit Union, a community-oriented development financial institution. to populations that are generally underserved.

This may not be such a useful tactic with large domestic banks, but it could at least serve to establish a starting point of reference for the rates or products you may be entitled to. You can then compare with other financial institutions. Small institutions such as credit unions and community banks may be more likely than national chains to work with you to find a product that meets your needs, especially if the alternative is predatory payday or title lenders. Credit unions have membership terms, often based on your location, employer, or other criteria, but you may find those criteria easier to meet than you think – or you may find ways around them. completely. Use this locator to find credit unions in your area.

2. Find a co-signer

Look for someone you trust in your life, whether a relative, friend or family member, who might be willing to co-sign on your behalf to secure your loan.

This is not a decision anyone should take lightly, however. Co-signing someone else’s loan means that if the borrower defaults, the co-signer is responsible for the payment. Not only must the co-signer be prepared to make the loan payments on their own, they may also become responsible for late fees or penalties, and their own credit rating could be affected.

Co-signing can often be a dangerous financial practice, warns Jill Schlesinger, CFP, host of the “Jill on Money” podcast. “If someone can’t get a loan, there’s usually a reason behind it,” she previously told the Marketplace Morning Report podcast. “If a lender is unwilling to give the money, why should you? “

If you decide to use this option, discuss all the details of your repayment with your co-signer beforehand, review the details of your loan agreement, and consider your state’s co-signer rights. Your co-signer should be aware of all the risks involved, be prepared to repay the loan on their own, and make an informed decision regarding the co-signature before applying for the loan.

3. Explore peer-to-peer lending

The loan between individuals is an alternative to traditional loans. Instead of borrowing from a bank or credit union, you can use an online service like Lending Club to connect with investors who are willing to lend money to borrowers.

Loan terms vary and you can often get a loan decision within a short period of time. Your terms are always determined by your credit history and you need to pass a credit check to get the loan, but the peer-to-peer loan can help you qualify more easily or get a better interest rate than a bank loan. traditional, even with bad credit.

Typically, peer-to-peer lenders report to credit bureaus, but check the terms of your loan agreement so you can work on improving your credit score while making timely payments each month.

4. Consider alternative payday loans

Rather than risking astronomical interest rates and continuous debt cycles with payday lenders, look at alternative payday loans (PAL) offered by credit unions.

These small loans range from $ 200 to $ 1,000, with terms of one to six months, according to National Credit Union Administration (NCUA) standards. You’ll pay high interest, which can even exceed 30% (more than even many credit cards), but if you develop a solid debt repayment plan, PALs can be a viable option and still much more affordable than payday loans.

5. Find out about homebuilder loans

If you don’t need immediate access to new money, a credit loan can be a great way to build a healthy payment history, a major factor in determining your credit score.

Instead of receiving cash upfront that you pay back over time, you’ll have a fixed term and loan amount, during which you make monthly payments. The lender reports these payments to the credit bureaus. Each month, this money will be deposited into an account that you can access at the end of your loan term.

“You are actually paying for yourself,” says Cristina Livadary, CFP, of Mana Financial Life Design, a financial planning firm in Marina Del Rey, Calif. “Then at the end of your term, you get that money back and you can use it however you want. “

Final result

Accessing loans when you have bad credit is certainly an uphill battle, but it is not impossible to find a lender, although many are tightening lending standards amid the ongoing recession.

If you need access to cash and have bad credit, take the time to examine your overall financial situation: set a budget you can stick to, organize your debt balances, explore forbearance or help with difficulties and make a plan. And given the current uncertainty, make sure that any loan you are considering is motivated by a real need. You don’t want to rack up more debt for expenses that can wait, like home renovations. Also, keep your long-term financial health in mind: create a small emergency fund if you don’t have a financial safety net, and consider what debt repayment strategies might be best for you.

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