You don’t need perfect credit to get a personal loan

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A low credit score shouldn’t be a problem if you want to get a personal loan to cover an emergency or consolidate your debt.

Borrowers with bad credit, which is a FICO score below 630, may need to do additional work to qualify for a personal loan. But taking these steps can not only help you get approved, but they could also get you a cheaper interest rate.

Quick tips for bad credit borrowers:

Clean up your credit, reduce your debt

Before you apply for a personal loan, get a copy of your credit report to see what the lender will see there, says Adrienne Ross, a certified Washington-based financial planner. You can get a free copy of your report from the three major credit bureaus at annualcreditreport.com.

Details on your credit report can show you why your score is low and how to fix issues before a lender sees them.

For example, an overdue account is probably a red flag for a lender, but you’ll have a better chance of qualifying if you can spot it and make the payment before you apply, Ross says.

Lenders also consider the percentage of your monthly income that goes toward debt repayment, known as the debt-to-income ratio. You’ll need a DTI of less than 50% to qualify with most lenders, and a lower DTI is often better.

If you don’t have an urgent need for the loan, pay off your debts before you apply, says Ross. Not only will lower outstanding balances lower your DTI, but they will also reduce your credit usage, which is the amount of your available credit that you use and a primary factor in calculating your credit score.

Add a co-signer or a guarantee

A faster solution may be to choose a lender that allows you to add a co-signer. A willing friend or family member with good credit and a solid income can help you get approved, says Thomas Rindahl, CFP with TruWest Wealth Management Services in Arizona.

Go ahead lightly with co-signed loans, he says, because the person you add to your application will have to pay off the loan if you can’t.

Some lenders may also offer secured personal loans that require you to pledge something you own, such as a vehicle or a savings account, he says. Borrowers with good or bad credit may have a better chance of qualifying and getting better rates with a secured loan, but the lender can seize the collateral if you don’t make your payments.

Make a repayment plan

Choose a lender who reports your loan payments to the credit bureaus, as this can help you build your credit, says Ross. This means the next time you borrow money or apply for a credit card, you might get a lower rate.

But because lenders report both on-time and missed payments, your ability to make them will determine whether your credit improves or deteriorates.

Be prepared to ask questions about rates, terms, and additional fees so you understand exactly what and when you will need each month, Ross says. Knowing this will help you make a plan to manage your payments.

Even with a solid payment plan, you might find yourself behind on a payment or two along the way. Since lenders don’t immediately report late payments to credit bureaus, Ross says, make the payment as quickly as possible to prevent your credit from being hit.

Compare lenders

Comparing offers from online lenders, banks, and credit unions can help you find the best rate and features for your situation.

Some online lenders offer personal loans specifically for borrowers with low credit scores. Look for reputable lenders who cap their annual rates at 36%, which consumer advocates and financial experts say is the highest rate an affordable loan can have.

Bad credit borrowers will likely qualify for rates close to the rate cap of a reputable lender, but far from the 300% or more APRs offered by payday lenders.

Online lenders can also allow you to pre-qualify with a soft credit check, allowing you to see the rate and loan amount you could get without hurting your credit score. Many banks and credit unions require borrowers to make a formal request to view their offer, triggering a strict check that can cause your score to drop temporarily. Some online lenders can also fund a loan the same day or the next day, while a bank can take a week or more.

On the other hand, your community bank or credit union may be more willing to consider the circumstances if a recent misunderstanding or a multi-year-old problem lowers your credit rating, says Rindahl.

“An online lender can have competitive rates, and it can be easy because you can apply from home, but if you don’t match their algorithm, you don’t match their algorithm,” he says. “Your local institution, whether it’s a credit union or a bank, is much more likely to look at the whole person,” he says.

About the Author: Annie Millerbernd covers personal loans for NerdWallet. Read more

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