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Due to financial stressors, an inability to repay loans on time, and poor borrowing habits, one can find themselves stuck with a poor credit score. However, despite the hurdles that come with bad credit, taking out a new personal loan isn’t impossible.
In this article, we will explore the steps associated with taking out a personal loan when you have bad credit. We will also go over alternate borrowing pathways if you’ve found your personal loan for blacklisted private sector borrowing or have not yet found a suitable bank to work with.
In the banking world, bad credit, or low credit scores, are an indication of a borrower’s poor borrowing habits.
Because banks judge individuals based upon their credit scores, individuals with higher scores are more likely to succeed in getting a loan, whereas those with poor scores may find it tricky to get their loan application approved or be lent limited amounts at higher interest rates.
For example, if your score ranges between 720 and 850, your estimated APR will be around 11.8%, whereas having a score between 630 and 689 will land you an estimated APR of 23.4% if your loan application gets accepted.
As a rule of thumb, the lower your credit score is (or, the more “bad debt” you have), the higher your loan’s interest rate will be. This is partially because banks want to discourage poor borrowers from taking out a new loan – poor borrowers have a history of missing payment deadlines, a practice that is frowned upon by lenders.
Note: Although poor loan repayment habits are the leading cause of bad credit, please note that your credit score is also temporarily lowered when you take out a new loan, regardless of your borrowing habits. However, in such cases, your score will gradually rebuild itself as you make loan repayments.
Getting a personal loan with a high DTI and bad credit is tricky. Luckily, there are a few ways around it, plus some tips to consider before applying for a loan. Let’s explore:
Start by analyzing your existing credit score and tallying it against your bank’s minimum credit score requirement. A score below 629 is likely to face loan application rejection, whereas a higher score stands a better chance of acceptance.
Each lender has a unique set of rules governing their loan-related transactions. Looking into different options can help you shortlist those lenders which offer the best benefits (including low-interest rates and more relaxed repayment options) to individuals with bad credit.
So, for example, if you’ve been looking into personal loans that use TransUnion only, you can now consider working with a bank that’s supported by Equifax or Experian instead.
Once you have determined who the least worrisome lenders are, you can start preparing for pre-qualification testing.
Pre-qualification refers to the process of assessing the terms and conditions attached to a specific loan before you actually sign the papers. It can also help you learn whether or not you are qualified to take out the loan that’s in question.
Engaging in pre-qualification checks will not affect your credit score.
Co-signed loans are an excellent way to reduce the interest rate on your new loan – remember, high interest is a side-effect of having bad credit. Singing on a loan partner with an excellent credit score can improve your chances of loan approval.
Once all the prerequisites leading up to this step are complete, you can start filing for a new loan. This includes filling in a personal loan application, filing W-2 data, and submitting financial statements. Be sure to collect all of these documents before you start the application process, or else you might find yourself short of the right papers with very little time left to look for them!
In contrast to mainstream banks, credit unions and online lenders are more likely to accommodate borrowers with bad credit.
Borrowing from a credit union requires union membership. Non-members are not allowed to submit loan requests. So, if you aren’t currently a member of any credit union, you should consider borrowing from an online lender instead.
However, if you are a credit union member, you have the benefit of relying upon your history, relationship with the union, and positive reputation to boost your chances of loan acceptance.
Federally chartered credit unions offer lower interest rates than alternate lenders because they are legally obligated to limit their APRs to 18%. However, be sure to check all of your options before committing to a lender’s terms and conditions.
Note: Obtaining long-term personal loans for blacklisted clients will be a near-impossible task. In such cases, it’s wiser to consider borrowing from friends or family, an online lender or consider bringing on a co-signer to share the borrowing responsibility with you.
Avant and Universal Credit are popular examples of online lenders who give out loans to applicants with poor credit scores. While all online lenders don’t necessarily attend to bad credit borrowers, many do, which is why they’re an excellent alternative for those who are not registered credit union members.
Note: Before borrowing from an online lender, be sure to check for and accommodate any possible deduction caused by the origination fee.
Also, avoid taking bad credit/blacklisted personal loans online from lenders offering “no-credit-check” loans – they may appear easy to borrow from initially, but once you’ve signed the paperwork, there’s a high chance you’ll be weighed down by a series of never-ending obligations that weren’t immediately obvious at the time of borrowing.
Calculating bad-credit loan repayments is easiest when done with an online repayment calculator. If you’re having trouble with self-calculations, though, consider scheduling a meeting with a bank representative or qualified financial advisor, lawyer, or accountant.
