If the personal loan is not to be used for an emergency, the best thing to do is to improve your credit score for you to be avail of the loan without feeling burdened at all. Make sure that you pay on time all your debts. Bring down the balance of your card to at least 30 percent of the credit limit allowed for you. Also applying for a new credit can make your situation worse.
The three mentioned elements make up 75 percent of your credit score: paying on time, reducing the use of credit cards, and not applying for a new credit. Be realistic in your goals and their timeline. It may be quite difficult to raise your credit score by 100 points in only 3 to 6 months.
If you happen to have an emergency and your loan application has been turned down repeatedly because of no credit or your bad credit, you can request to be interviewed by a credit union loan officer for you to convince them that you are credit-worthy.
Once you get a schedule for an interview, make sure that you have all the necessary documents. Lending institutions seek for signs of stability on borrowers. It’s better for you to show them that you lived in the same house or in the same city and worked the same job for several years.
The following documents will prove your credit-worthiness to lenders:
- Tax returns and W-2s and 1099 forms from at least the last two years.
- List of all your assets such as a home, car, or any property and where you are in paying them all off.
- Information about your salary, employment history, and pay stubs
- Whether you receive alimony or child support
- Bank statements for checking, savings, and cash deposit.
- List of unsecured debts like credit card and medical bills.
Not all of these documents will be required by the lenders; but if you have bad credit, anything that will show that you have become more responsible with your money will help you get a loan. You will also be asked questions that may sound negative and offensive to you such as:
- Have you had any lawsuits?
- Have you ever declared bankruptcy or had a foreclosure judgment?
- Do you know your ethnic background?
- Do you have any judgment against the items in collection?
Remember that the in-person interview is to convince the lender that you are capable of repayment. Any document that will support this argument especially proof that you paid off loans on assets such as a car or a boat will be helpful to you.
The following are some concrete steps to take for you to get a loan despite having bad credit:
1) Understand that your credit score affects the interest rates.
In general a credit score is the most crucial factor that affects the decision of the lender on what interest rate to give you. Even if many lenders will offer personal loans to people particular those of fair credit, if you have bad credit, expect to pay higher interest rates. That’s why it’s important to check with multiple lenders for you to compare the interest rates and terms. Don’t think that when you are turned down by one lender you will not be able to get a loan. Just keep on searching until you receive a good offer.
2) Know your most recent credit score.
It’s one thing to know that you have bad credit; it’s another to know how bad it is. FICO, the credit scoring company has five categories of credit scores. They are as follows:
very good: 740-799
It’s wise to check one’s credit score before you apply for any loan. You need not have an excellent credit score for you to get a loan, but you will notice the difference in the loan amount you can avail yourself of vis-à-vis your credit status.
3) Calculate your own debt-to-income ratio.
Some lenders will calculate the borrower’s debt-to-income ratio or the percentage of the monthly income that goes to debt. This will guide their decision whether to give you a loan or not and if ever granted the amount of loan suitable in your condition.
The formula is simple. Just divide all the monthly debt payments by your gross monthly income and you get a ratio or a percentage. Lenders prefer their borrowers to have 35 percent or lower debt-to-income ratio. This includes the loan you are applying for and those that are currently existing.
4) Consider getting a loan from a credit union.
Credit unions are a huge help when you need a personal loan and you have bad credit. These institutions are more flexible, and their maximum interest rate is at 18 percent.
Credit unions according to the Experian, credit unions have the non-profit status which enables them to accept riskier borrowers that are not normally accepted by banks. They often offer lower fees and interest rates too.
5) Consider getting a home equity loan.
If your home has equity, make use of the equity. It’s money that is always available and can be used without considering the low credit score. A home equity loan does not consider low credit score a factor. For as long as your home has equity, you can take advantage of the amount.
Home equity loans have fixed interest rates and repayment terms. It is possible for you to borrow money for up to 30 years. The interest can be deductible on your taxes when they are itemized. The money can be used to make important changes to your current home.
This kind of loan is not without drawbacks. First off, your home will be made collateral. That means if you fail to repay the loan, you can end up homeless. There are also some home equity loans that have fees and ones that require you to have a substantial home equity for you to qualify. That makes it highly important to research and compare multiple home equity loan lenders.